Silvercrest Asset Management Group (SAMG) Q1 2021 Earnings Call Transcript

Silvercrest Asset Management Group (SAMG -1.86%)
Q1 2021 Earnings Call
May 07, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Silvercrest Asset Management Group Inc. quarter 1 2021 earnings conference call. [Operator instructions] Please note, this event is being recorded. Before we begin, let me remind you that during today's call, certain made statements regarding the future performance are forward-looking statements.

They are based on the current expectations and projections, which are subject to a number of risks and uncertainties, and many factors could cause actual results to differ materially from the statements that are made. Those factors are disclosed in the filings with the SEC under the caption Risk Factors. For all such forward-looking statements, we claim the protections provided by the Litigation Reform Act of 1995. All forward-looking statements made on this call are made as of date hereof, and Silvercrest assumes no obligation to update them.

I would now like to turn the conference over to Rick Hough, chairman and CEO of Silvercrest. Please go ahead.

Rick Hough -- Chairman and Chief Executive Officer

Great. Thanks very much for the introduction. Welcome to the first-quarter results of 2021 for Silvercrest. Having been founded in the spring of 2002, Silvercrest has now begun its 20th year in business, which will culminate in our 20th anniversary celebration in April of 2022 next year.

Silvercrest's founders and partners embarked on an entrepreneurial journey to create the foremost wealth and asset management boutique in the United States. We're very proud at having created an enduring firm founded on bedrock principles as well as a strong and proud culture. We remain dedicated to putting our clients first and creating a business that serves its clients with highly regarded institutional quality capabilities for generations. We concluded the first quarter of 2021 and begin our 20th year in business with new highs in our asset management, revenue, and adjusted EBITDA.

Silvercrest's discretionary AUM, which drives revenue, increased 6.3% from the fourth quarter of 2020 to reach $21.9 billion, which is an increase as well of 47% year over year from the first quarter of 2020. The firm's total AUM grew to $29 billion by the end of the first quarter of 2021. Silvercrest concluded the first quarter of this year with $31.2 million in revenue, and the firm's quarterly adjusted EBITDA was $9.7 million or an annualized adjusted EBITDA run rate of $38.8 million. Adjusted diluted earnings per share increased 16.7% year over year to $0.42 per adjusted diluted share.

The firm's first-quarter 2021 adjusted EBITDA margin was 30.9%. With strong relative performance, Silvercrest's institutional equity new business opportunities continue to grow across Silvercrest's suite of proprietary equity capabilities. Our new sub-advisory relationships added assets in the first quarter of 2021. We are optimistic about our growth prospects for this business with a robust new business pipeline.

Silvercrest's organically built Outsourced Chief Investment Officer offering continues to grow, and its pipeline of opportunities has increased as well. That business more than doubled during 2020, and we hope to cross the important $1 billion AUM threshold during 2021. We've hired new high-net-worth portfolio management professionals for the wealth management business and will continue to add new talent, both to maintain a high level of client service and to grow the business. Silvercrest has a track record of growing new talent and will continue to do so.

We believe our brand, culture, capabilities, and technological innovation make Silvercrest a premier partner for select businesses and professionals. Regardless of the environment, Silvercrest will continue to seek to effectively deploy capital to complement organic growth. Upon launching our 20th year, we remain a mature and tested team with a long-term vision, intent on building the business upon a sustainable and enduring platform. As with industry consolidation 20 years ago, there's now unprecedented change in technology, asset management, and there are waves of consolidation once again that threaten the business models dedicated to the best interests of the client.

We have a lot to accomplish to continue building the premier wealth and asset management boutique in the nation. Silvercrest has implemented a successful long-term organic growth plan, and we plan to continue that growth trajectory and high cash flow generation, both organically and through careful strategic acquisitions. On May 4, 2021, our board of directors declared a quarterly dividend of $0.16 per share of Class A common stock, and that dividend will be paid on or about June 18 of this year to shareholders of record as of the close of business on June 11. With those introductory remarks, I will now turn it over to Scott Gerard to review the financials, and then we will open it up for questions.

Scott?

Scott Gerard -- Chief Financial Officer

Thanks, Rick. As disclosed in our earnings release for the first quarter, discretionary AUM as of March 31, 2021, was $21.9 billion, and total AUM as of March 31, 2021, was $29 billion. Revenue for the quarter was $31.2 million and reported consolidated net income for the quarter was $4.3 million. Looking more specifically at the quarters year over year, again, the first-quarter revenue was approximately $31.2 million.

That represented a 10% increase over revenue of approximately $28.4 million for the same period last year. This increase was driven primarily by market appreciation, partially offset by net client outflows in discretionary AUM. Expenses for the first quarter were $25.5 million. That represented approximately a 62% increase from expenses of $15.8 million for the same period last year.

This increase was primarily attributable to increases in G&A expenses and compensation and benefits expense of $7.9 million and $1.9 million, respectively. Comp and benefits expense increased by $1.9 million or approximately 12% to $17.6 million for the three months ended March 31 of this year. That was an increase from $15.7 million for the three months ended March 31 of last year. The increase was primarily attributable to increases in the accrual for bonuses, salaries and benefits expense, primarily as a result of merit-based increases and newly hired staff and equity-based compensation expense due to an increase in the number of unvested restricted stock units and unvested nonqualified stock options outstanding.

G&A increased by $7.9 million to $7.9 million for the three months ended March 31 of this year from $43,000 for the three months ended March 31 of last year. This was primarily driven by increases in the fair value of contingent consideration related to the Cortina acquisition of $8.3 million. In addition, there were some increases in occupancy and related expenses and professional fees, which were partially offset by decreases in travel and entertainment expenses as a result of the pandemic and portfolio and systems expense. Reported consolidated net income was $4.3 million for the quarter as compared to $9.7 million in the same period last year.

Reported net income attributable to Silvercrest or to Class A shareholders for the first quarter of this year was approximately $2.6 million or $0.26 per basic and diluted Class A share. Adjusted EBITDA, which we define as EBITDA without giving effect to equity-based compensation expense and noncore and nonrecurring items, was approximately $9.7 million or 30.9% of revenue for the quarter, compared to $8.2 million or 29% of revenue for the same period last year. Adjusted net income, which we define as net income without giving effect to noncore and nonrecurring items and income tax expense assuming a corporate rate of 26%, was approximately $6.2 million for the quarter or $0.43 and $0.42 per adjusted basic and diluted earnings per share, respectively. 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 had unvested restricted stock units and non-qualified stock options to the total shares outstanding to compute diluted adjusted EPS.

Taking a quick look at the balance sheet. Total assets were approximately $192.2 million as of March 31 of this year, compared to $213.8 million as of the end of last year. Cash and cash equivalents were approximately $42.6 million at March 31, 2021. This compared to $62.5 million at December 31 of last year.

Keep in mind our cash at March 31 of this year is net of 2020 related incentive compensation paid during the first quarter of 2021. Total borrowings as of March 31 of this year were $11.7 million, and total Class A stockholders' equity was approximately $71.8 million as of the end of the first quarter of this year. That concludes my remarks. I'll turn the call over to Rick for Q&A.

Rick Hough -- Chairman and Chief Executive Officer

Thanks very much, Scott. We're now available to take questions at this time. Thanks.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Sumeet Mody with Piper Sandler. Please go ahead.

Sumeet Mody -- Piper Sandler -- Analyst

Hey. Thanks. Good morning, guys. Just wanted to maybe start with the institutional pipeline.

Can you update us on that six months, the actionable pipeline today? How much of that is related to OCIO? And then can you update us on the current size of the OCIO platform and kind of your confidence level of reaching that $1 billion threshold this year as well?

Rick Hough -- Chairman and Chief Executive Officer

Yes. We don't normally break out the pipeline for OCIO separately from all of the -- from the institutional business, but that pipeline has grown. And I don't want to get into this every quarter. I'd rather just talk about the institutional business as a whole.

But we're -- we see $800 million in reach where it's climbing up toward that in terms of total AUM. And the pipeline has grown, and I have a high confidence that we'll cross that $1 billion threshold. With regards to the rest of the institutional business, including OCIO, the actionable six-month pipeline, which we very conservatively measure. That includes invite-only searches and where we're in the semifinals.

Those have grown substantially. As of the beginning of the first quarter, the pipeline was $1.34 billion, as you may recall. And it now stands at $1.8 billion. And that's grown completely across our product suite, OCIO, U.S.

value, U.S. growth, international.

Sumeet Mody -- Piper Sandler -- Analyst

That's great. I just wanted to touch on the organic growth in the quarter as well. Between the closed accounts and the net cash outflows, it looked like about $500,000 of outflows there. Can you unpack that a little bit? And how much was related to taxes at all? And should we expect the second quarter to see more kind of a normalized tax outflow in that quarter as well?

Rick Hough -- Chairman and Chief Executive Officer

Yes. Right. So that gets complicated. It's very hard to get our arms around what the taxes may look like and when they actually flow.

It tends to be something that we see more in the second quarter than the first. We actually had a very good business development quarter in terms of our new accounts and additional monies into the firm from our high net worth clients. And in fact, it was pretty good on the institutional business. The negative outflow that we see this quarter is solely effectively due to the closing of the AMG mutual fund that we sub-advise.

AMG, as you may well know from the news, decided to terminate all of its external managers. Despite our good performance, Silvercrest was among them. And I'm really not going to comment more on that beyond. It's in the hands of our outside counsel.

Sumeet Mody -- Piper Sandler -- Analyst

Got it. OK. And then the last one for me. I'll hop back in the queue.

I noticed you guys did not increase the dividend this year. Wondering if you could elaborate on the strategy of the payout. Are you kind of maintaining a minimum yield or kind of aiming for a target? And then maybe just talk about the capital allocation a little bit more broadly. Is the focus still kind of targeted hiring and the team lift-outs, or are you kind of having some more positive conversations on the M&A side at all as well?

Rick Hough -- Chairman and Chief Executive Officer

Yes. Thanks. And excuse the length of perhaps this answer. So you're correct.

We didn't raise the dividend again. We've kind of reached a yield on our stock that we think is highly favorable, in that it might be pushing on a string to continue increasing that dividend and therefore distributions at this time. We have had a policy of both consistently increasing the dividend in the past as well as being very conservative with the amount of cash that we're upstreaming in order to pay that dividend. And while cash flows are very robust, and as you've seen, we're reaching all-time highs with regards to that, for the company, we just feel like the amount that we're paying out in dividends is highly favorable, and we have other uses for the capital instead at this time.

And so we do have conversations going on, of course, on the M&A front. That's always been a constant year. No prediction of one could fall. But you may recall, in 2019, all of a sudden, we had a tremendous amount of cash to put to use when we joined with our great colleagues in Milwaukee.

And that can happen at any time, and it's pretty important for a company of this size. So yes, that's a definite potential use of cash that we're keeping our eye on. In terms of -- obviously, hires do affect our cash flow but not necessarily the large cash reserves that we have on the balance sheet. And so we are looking strongly at other alternatives for use of cash that could include ways of returning capital to shareholders, including buybacks instead of just the dividend.

And that's a conversation that the board has on a regular basis and is considering as part of our capital allocation strategy.

Sumeet Mody -- Piper Sandler -- Analyst

OK. Great. Thanks, Rick.

Operator

Our next question is going to come from Sandy Mehta with Evaluate Research. Please go ahead.

Sandy Mehta -- Evaluate Research Ltd -- Analyst

Good morning. Congratulations on the strong results. And in terms of some of the -- you mentioned new portfolio management professionals were hired. Could you give some more color in terms of are they more on the client relationship side, marketing side? Or are they on the new strategy side, possible new products or strategies?

Rick Hough -- Chairman and Chief Executive Officer

Yes. Thanks, Sandy. So it's actually on both fronts. You may recall that we launched a new large-cap and multi-cap growth strategy with our great colleagues in Milwaukee.

We felt that they have a robust analyst team that has been proven to provide really great results, and we see the opportunity to go up in the market cap spectrum. So we hired a very talented senior portfolio manager to lead that product development with the team there in large multi-cap, Andy Young. And that hire was toward the end of last year. Again, we opened that strategy up for investing as of January 1, both multi-cap and large-cap.

On the other side, more of the hires have occurred both at the junior level, mid-career, kind of early career level to become full-fledged portfolio managers. On the high net worth side at our firm, we don't have people we just call relationship managers. Our portfolio managers have a lot of responsibility for the actual investment work on behalf of our clients. They are investment professionals.

They are not -- as I like to say, they are not show ponies who are good at taking people to lunch, so we call them portfolio managers because they deserve that title. More of the hiring has been occurring on that side. We've hired a few over the past year, year and a half. We have more that we're speaking to, and I would expect more hires this year.

It should be noted that despite those hires, the growth of the firm has allowed us to be pretty conservative with regards to the percentage of revenue that we're paying out with compensation. Despite the growth in headcount, we've been able to maintain that ratio pretty -- on a pretty stable basis. And so my comments earlier this morning had to do with those hires over the past year, maybe a bit longer, depending who you look at and the prospects for more occurring this year. The growth in the first quarter, ex what happened with AMG, was actually pretty good.

And some of that growth, of course, was due to the fact that we've got new talent who are marketing to new high net worth clients. So it's a broad statement across the firm, but the weight of it was to the high net worth side, especially considering that we acquired new portfolio management from the equity analysis side only a year and a half ago.

Sandy Mehta -- Evaluate Research Ltd -- Analyst

So the hiring of Andy Young and the other people in Milwaukee, you mentioned large-cap growth. Would that be a new strategy then?

Rick Hough -- Chairman and Chief Executive Officer

So the Milwaukee hiring was basically Andy Young because we already have the analyst team to support the effort. But yes, it's a new strategy. We launched it in January 1st of this year.

Sandy Mehta -- Evaluate Research Ltd -- Analyst

OK. Great. OK. Thank you.

Rick Hough -- Chairman and Chief Executive Officer

You're welcome, Sandy.

Operator

[Operator instructions] And the next question comes from Christopher Marinac of Janney Montgomery Scott. Please go ahead.

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

Thanks. Good morning. Rick and Scott, just wanted to cover the EBITDA margin. And to what extent there were any external factors that just made it so strong this quarter?

Rick Hough -- Chairman and Chief Executive Officer

Yes. I'll let Scott take that. We've been consistently bumping up or maybe at our best going just over 30%, but I'll let Scott address the seasonality, and then I may address it more broadly afterward.

Scott Gerard -- Chief Financial Officer

Yes. How are you? For the first quarter of this year, there are certain expense benefits that we've had, such as travel and entertainment expense and other client-related expenses, that have been -- continue to be superficially low due to the pandemic. So on an incremental basis, those definitely help the margin. Sometimes, there is some other seasonality regarding -- in the first quarter regarding our audit expense because it's based on the level of provision of service.

The lion's share of our annual audit peaks placed during the first quarter. So that will definitely have an impact to some extent. But this year, and it was consistent through 2020 as well, there are a lot of client-related expenses and travel expenses that just are at really low levels because of the environment. Just generally -- yes, and just generally speaking about our EBITDA margin.

If you look historically, our best margins tend to just go over 30%, often driven by performance fees in the fourth quarter because that's just a great guinea with no associated expenses. I have long said that in this business if you're reinvesting and growing the business, it's hard to maintain much above 30% or 30% on an ongoing basis. And that if you're really investing in the business, you might not get down a few clicks. I used to say in the past, hey, maybe we have to have a 24%, 25% EBITDA margin as we make investments in future growth that, that more than pays for itself.

Given the growth of the company over time, since I first started saying that, it's probably not four or five basis points. It may be only a couple now because -- just the size of the cash flow is that much larger. So I would consider this trending toward the high side for us, and I wouldn't be surprised to see that cycle down just a bit as we make investments, especially in personnel.

Rick Hough -- Chairman and Chief Executive Officer

Yes. And just to state the obvious, as the country opens up more and we have greater access to meet with clients and once more travel commences those types of expenses, I would expect to increase to more normalized levels.

Scott Gerard -- Chief Financial Officer

And that, too, leads to growth. It's very important that we get out there and seeing new prospects. I did mention the high net worth pipeline, but we've seen more and more activity toward the end of this first quarter, leading into the second quarter. And I think it's partly a reflection of people opening up and thinking about things as their lives change with the rest of the country.

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

Great. That's super helpful. Thanks very much. And I guess one other question I had is, given sort of recent events system and general asset management industry in the first quarter, is there a greater focus on compliance when some external events happen, and therefore, that actually supports the OCIO business that you're trying to do?

Rick Hough -- Chairman and Chief Executive Officer

So I think -- I don't know if it's a real change in compliance that's driving it, but there is definitely a long-term trend of board members who are acting as fiduciaries on behalf of either institution, whether that's an endowment, a nonprofit, pension fund, to be much more aware of their fiduciary duties to their clients and to outsource the investment function to professionals so that they have somebody to hold accountable for the performance and actions that are being undertaken on behalf of the investment pool or clients. And that trend is not just one that's been with us now for quite some time. I would argue, it's accelerating. And it's accelerating, in part, because I think with technological tools, the ability for sophistication for these kinds of portfolios to be much more profound, I think more and more boards are finding that they can't do it on their own, quite frankly, or engage the kind of professionals internally that are required to compete in this marketplace and are therefore looking more and more to outside people with proven track records.

The compliance burdens on our business itself, apart and separate from the OCIO business. There's always been a backdrop. Thank goodness, we've always had the critical mass and professional team here to handle that. You don't like to have a competitive advantage due to that.

But certainly, in a boutique-driven RIA world that we compete in, it is one for us because we can -- we have the scale to take that on more easily than others. And, of course, we're watching very carefully with the change in administrations on what that might mean. I myself, I'm on the Executive Committee of the Investment Adviser Association, which is the industry group for RIAs, and that's a very important component of what we do. But I wouldn't say that's driving business one way or the other.

It may, at the margins, push some smaller firms to seek a larger hall like Silvercrest and that's always been in the background. I would say that's not a new or accelerating trend either.

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

Got it. Great. Thanks for taking my questions. I appreciate it.Yes.

Absolutely. Anytime.

Operator

[Operator instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Rick Hough for any closing remarks.

Rick Hough -- Chairman and Chief Executive Officer

Great. Thanks very much for joining us today and for the good questions. Overall, the business was quite strong in the first quarter, of course, bolstered by very strong markets as well. And as we see the country opened back up and our ability to get back into the field, meeting with either consultants or families about our business, we're pretty optimistic about the pipeline we see this year as we begin our 20th year in business.

Thanks so much for joining us.

Operator

[Operator signoff]

Duration: 28 minutes

Call participants:

Rick Hough -- Chairman and Chief Executive Officer

Scott Gerard -- Chief Financial Officer

Sumeet Mody -- Piper Sandler -- Analyst

Sandy Mehta -- Evaluate Research Ltd -- Analyst

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

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