Silvercrest Asset Management Group (SAMG) Q2 2021 Earnings Call Transcript

Silvercrest Asset Management Group (SAMG 1.75%)
Q2 2021 Earnings Call
Jul 30, 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. second-quarter 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 statements made regarding our future performance are forward-looking statements.

They are based on 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 our filings with the SEC under the caption Risk Factors. For all such forward-looking statements, we claim the projections provided by the Litigation Reform Act of 1995. All forward-looking statements made on this call are made as of the date hereof and Silvercrest assumes no obligations 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

Thanks very much. Good morning, everyone. Silvercrest is pleased to report strong results for the second quarter of 2021. The firm's discretionary assets under management, which drives revenue, increased 4.6% during the quarter to reach $22.9 billion, which represents a new high and a year-over-year increase of 32.4%.

The firm's total AUM grew to $31 billion. Silvercrest concluded the quarter with $33.1 million in revenue, and the firm's adjusted EBITDA for the second quarter was $10.4 million, or a year-over-year increase of 56.7%. Adjusted diluted earnings per share for the second quarter increased 66.7% year over year to $0.45 per adjusted diluted earnings per share. Silvercrest's new business opportunities continue to grow, thanks to a strong investment culture and results for high net worth and institutional clients alike.

On July 28, the company's board of directors approved a share repurchase program authorizing the company to repurchase up to $15 million of the company's outstanding Class A common stock. Also on July 28, the company's Board of Directors approved an increase of approximately 6% of the company's quarterly dividend from $0.16 per share of Class A common stock to $0.17 per share. The upcoming dividend of $0.17 per share of common stock represents an annual yield of approximately 4.5% based on the closing price of the company's common stock on July 27. The dividend will be paid on or about September 17 to shareholders of record as of close of business on September 10.

Those conclude my introductory remarks, so I'll turn it over to our CFO, Scott Gerard, to go through the financials, and then we'll take questions.

Scott Gerard -- Chief Financial Officer

Thanks, Hough. As disclosed in our earnings release for the second quarter, discretionary AUM as of June 30 was $22.9 billion, and total AUM as of the end of the second quarter was $31 billion. Revenue for the quarter was $33.1 million and reported consolidated net income for the quarter was $5.7 million. Looking further into the second quarter, again, revenue was approximately $33.1 million.

This represented a 38% increase over revenue of approximately $24 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 second quarter were $25.8 million, and this represented approximately a 14% increase from expenses of $22.7 million for the same period last year. This increase is primarily attributable to an increase in compensation and benefits expense of $5.1 million, partially offset by a decrease in G&A expenses of $2 million.

Comp and benefits increased by $5.1 million or approximately 38% to $18.5 million for the second quarter from $13.4 million for the three months ended June 30 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. General and administrative expenses decreased by $2 million or approximately 22% to $7.3 million for the second quarter from $9.3 million for the second quarter last year. This was primarily attributable to decreases in the fair value of contingent consideration related to the Cortina Acquisition of $2.2 million and portfolio and systems expense, partially offset by increases in sub-advisory and referral fees, occupancy and related expenses and travel and entertainment expense.

Reported consolidated net income was $5.7 million for the quarter as compared to $0.8 million in the same period last year. Reported net income attributable to Silvercrest or the Class A shareholders for the second quarter was approximately $3.3 million or $0.35 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 $10.4 million or 31.5% of revenue for the second quarter, compared to $6.7 million or 27.7% 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 $6.7 million for the quarter or $0.46 and $0.45 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. Looking at the first half of the year, revenue was approximately $64.3 million, representing approximately a 23% increase over revenue of $52.4 million for the first half last year. This increase was driven primarily by market appreciation, partially offset by net client outflows in discretionary AUM.

Expenses for the first half were $51.3 million, representing approximately a 34% increase from expenses of $38.4 million for the first half last year. This increase was primarily attributable to increases in comp and benefits expense of $7.1 million and G&A expenses of $5.8 million. Compensation increased by $7.1 million, or approximately 24% to $36.1 million for the first half this year, from $29.1 million for the first half last year. The increase, again, was primarily attributable to increases in the accrual for bonuses, salaries, and benefits expense 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.

General and administrative expenses increased by $5.8 million or approximately 63% to $15.2 million for the first half this year from $9.3 million for the first half last year. This was primarily attributable to increases in the fair value of contingent consideration related to the Cortina Acquisition of $6.1 million, occupancy and related costs, professional fees and insurance expense, partially offset by decreases in travel and entertainment expense, portfolio and systems expense, depreciation and amortization and office expense. Reported consolidated net income was $10 million for the first half, as compared to $10.5 million for the first half last year. Reported net income attributable to Silvercrest or to Class A shareholders for the first half of this year was approximately $5.9 million or $0.61 per basic and diluted Class A share.

Adjusted EBITDA was approximately $20.1 million or 31.2% of revenue for the first half, compared to $14.9 million or 28.4% of revenue for the same period last year. Adjusted net income was approximately $12.9 million for the first half or $0.89 and $0.87 per adjusted, basic and diluted earnings per share, respectively. Looking quickly at the balance sheet as of June 30 of this year, total assets were approximately $202.8 million compared to $213.8 million as of the end of last year. Cash and cash equivalents were approximately $53.6 million at June 30, compared to $62.5 million at the end of last year.

Total borrowings as of June 30 were $10.8 million. Lastly, total Class A stockholders' equity was approximately $73.7 million at June 30. That concludes my remarks. I'll turn it over to Rick for a Q&A.

Rick Hough -- Chairman and Chief Executive Officer

Thanks very much, Scott. We'll take questions regarding the company at this time.

Questions & Answers:

Operator

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

Sumeet Mody -- Piper Sandler -- Analyst

Thanks. Good morning, Rick and Scott.

Rick Hough -- Chairman and Chief Executive Officer

Good morning.

Sumeet Mody -- Piper Sandler -- Analyst

Just wanted to start on the repurchase authorization. How are you guys thinking about the pace of buybacks going forward? Should we think about it from a buyback payout ratio range that you're targeting? or any color there would be helpful.

Rick Hough -- Chairman and Chief Executive Officer

So the 15 million that we announced is somewhere in the ballpark, I believe, of 10% of the outstanding Class A shares. So that was kind of the ballpark in terms of size. In terms of the action that we will take in time line, no, we have not determined that. We view our stock at compelling value.

Obviously, we wouldn't do this otherwise. And so it remains to be seen. Look, markets also go through weaknesses and we want to make the best accretive purchase as possible on behalf of shareholders. But the short answer is no, we don't have a defined timeline.

It's open ended and we will assess it as we go along here.

Sumeet Mody -- Piper Sandler -- Analyst

OK. I just had a couple on the discretionary AUM in the quarter. If you could just kind of clarify a little bit on the new client account number, a little bit lower of a quarter than we've seen in a while. Can you talk about the drivers around that number?

Rick Hough -- Chairman and Chief Executive Officer

Yes. I think some of it was a little bit quieter with regards to the institutional business. The high net worth business also did a little bit better when you look at net flows, by the way, overall. That number -- I don't know what to say about it, really.

There's really no color other than sometimes when accounts are opened, additional add-on funds end up in our net flows because once you only count the amount that is put into a new relationship when the account is open. Any follow-on AUM, of course, is going to be a net positive flow. So it could just be a function of that. It was just a little quieter in general, I would say, in particular, in the institutional business.

Sumeet Mody -- Piper Sandler -- Analyst

OK. And then similarly on the kind of net cash inflow and outflow line. I know seasonality is a big factor there with the tax-related outflows. It was a little bit lighter, but I assume that's mostly just a pull forward from first quarter or?

Rick Hough -- Chairman and Chief Executive Officer

Yes. And some of that is possibly taxed. Tax may actually be bigger next year. Most of the negative was driven by rebalancing in the institutional business.

We were close to being pretty nicely positive, if not totally positive on the high net worth side. So the tax is not as big as a drag as it would normally be. It was rebalancing. We continue to have very strong performance across our equity capabilities and I would say it's more a function of that.

Sumeet Mody -- Piper Sandler -- Analyst

OK. And then just one, last one before I hop back in the queue. Just on the fee rate, it seems like it's kind of steadily creep lower over the last year. Can you talk about sort of the driver there? Is it just kind of a matter of winning larger mandates over time? And how do you expect that to sort of trend going forward? Considering the growth in the high net worth channel, too.

Rick Hough -- Chairman and Chief Executive Officer

Sure. We talked about this last quarter. Our discretionary fee basis for accounts really hasn't creeped around at all. It's been within a basis point, too, for basically 18, 19 years.

It may just be a function of stub period revenue that's driving at in your calculations. We don't see any compelling trends one way or the other, at all. The larger mandates and institutional business, as we've discussed, as we grow CIO or we get very large families which we've gotten larger over the time, is going to drive fee basis down as we win business. But it's already -- it's done that.

So I'm not sure we're seeing anything other than either asset allocation or vagaries of sub-period revenue.

Sumeet Mody -- Piper Sandler -- Analyst

OK. Thank you.

Operator

The next question comes from Sandy Mehta from Evaluate Research. Please go ahead.

Sandy Mehta -- Evaluate Research -- Analyst

Yes. Good morning. Congratulations on the strong results, and I was also very happy, pleased to see the buyback announcement and the dividend increase. Could you comment a little bit on the pipeline that you're seeing right now in terms of actionable pipeline and any further updates on OCIO?

Rick Hough -- Chairman and Chief Executive Officer

Sure. So the as you may recall, the pipeline that we measure really, really froze up last year and had dramatically reduced its rebuilt. The total pipeline for our value strategies, growth strategies, international OCIO is at $1.7 billion. Remember, those are very high-quality actionable pipeline opportunities.

So that's looking quite strong, and we have what I would consider a lot of other kind of close to actionable activity that's not in that pipeline yet that could well be added in future months. In addition, I expect that the OCIO business will have some results once we get past Labor Day and those boards are meeting. I don't really necessarily expect a lot of action on the current mandates that we're competing for during the month of August, we'll be looking out to September, October for more of those opportunities. But it's quite strong and performance remains strong, which is good.

As I mentioned earlier, the bigger issue in that business has been -- recently has been rebalancing after growth. It's just the nature of the business. It's a high-class problem. With regards to OCIO, depending how you measure it, according to the metric that we used to use, it's about $980 million now, so that you have an apples-to-apples comparison.

So it continues to grow toward that $1 billion benchmark. There are some nontraditional OCIO accounts in there. And if we started to measure on that basis, it'd be closer to $700 million. Not a step backwards for the business, just a way of looking at the kind of institutions that are in the OCIO model.

So I may switch to one in the future just as a heads up so that you have an apples-to-apples comparison. But the pipeline and the action around that business is very strong. It's how I would characterize it. So I remain very optimistic.

On the high net worth side, we don't keep a traditional pipeline. It doesn't really work the same way as the institutional business. Results have been strong. So that's a great tailwind.

We have capacity with new portfolio managers. And as I mentioned, it was actually a pretty good quarter for high net worth in the second quarter this year.

Sandy Mehta -- Evaluate Research -- Analyst

And then the buyback and the dividend, does that also reflect your feeling in terms of acquisitions or the possibility of acquisitions? Do you see less opportunity there and perhaps, that also factors into your dividend and buyback decision?

Rick Hough -- Chairman and Chief Executive Officer

Yes. Sure. The available uses of cash would -- the biggest would be acquisition. And while we -- I was always looking at the best use of how to allocate our capital for a return to shareholders back in very late 2018 and in through '19, of course, I knew that we have the possibility for use of substantial amount of cash with regards to bringing on board our great colleagues in Milwaukee.

We're always having conversations, but I have said consistently that we're not seeking to do acquisitions just to get larger. There has to be a very compelling strategic reason and hopefully, two or three strategic reasons for an acquisition, especially on the wealth management side. At the core, this is a very, very strong wealth management business, always has been. It's the bulk of our discretionary assets.

We care very deeply about the kind of culture that a potential partner and/or their clients would be working in and vice versa, what we're bringing into our culture. And at the current prices that we have seen in the kind of roll-ups that have been occurring in this business, it's been hard to find compelling opportunities that tick all of those boxes so that we're building a really strong long-term engineering business, which is the goal here. In the absence of that and the continued building up of cash, why not own more of one of the best Wealth Management business in the U.S., which is to say Silvercrest. So just acquisition by another means you might consider it.

I think it's a good use of capital to own more of a great business. And so that's what was driving our decision. We are very conservatively managed. We have light leverage.

We will still have plenty of cash. So we just felt that we can do all of the above. We can pay a handsome dividend to make sure our shareholders are getting a great yield on the stock. We have a policy of increasing it on a regular basis when we can.

We've sustained that. We do it when we know we can sustain the dividend even in the wake of market downturns. We feel that this is conservative and we can do that. And we feel that given the balance sheet and growing cash position that we can afford to own more of a great business, while still having the opportunity to make an acquisition when one compelling comes along.

Sandy Mehta -- Evaluate Research -- Analyst

Great. Thank you very much.

Rick Hough -- Chairman and Chief Executive Officer

You're welcome.

Operator

[Operator instructions] The next question comes from Chris Sakai from Singular Research. Please go ahead.

Chris Sakai -- Singular Research -- Analyst

Yes. Hi. Good morning.

Scott Gerard -- Chief Financial Officer

Good morning.

Rick Hough -- Chairman and Chief Executive Officer

Good morning.

Chris Sakai -- Singular Research -- Analyst

Most of my questions have been asked already. I just wanted to get a feel about, I guess, the environment on the high net worth side as far as acquiring new business. I wanted to see, if anything, how is the delta variant closing on the environment now?

Rick Hough -- Chairman and Chief Executive Officer

I'm not sure I understood that question, Chris. Could you reiterate or maybe ask one question?

Chris Sakai -- Singular Research -- Analyst

Do you see continued growth? How is the growth in high net worth as we head into this back half of the year?

Rick Hough -- Chairman and Chief Executive Officer

OK. Oh with delta variant, you were referring to the virus, not a delta, meaning a statistical measure of something. I understand that. I'm sorry about that.

So on the high net worth side, we've got a great team. It has been very long-serving, very sticky personnel and client base. It's very, very strong, compelling business, one of the best in the United States, I think, far none. So as we have grown in size and profile in general, we get more and more of those opportunities.

So I remain bullish on having built a great foundation here with my partners for continued growth in the high net worth business. As I said as well, we invested in new portfolio managers just prior to the outbreak of coronavirus, we're talking to more. So we have capacity, which is really important in this business. And we have worked very hard to maintain capacity as well as to mentor and bring up younger professionals in this business in the Silvercrest way.

That all bodes well for good future growth in that business. And finally, just as we have good investment results driving the institutional business that, of course, benefits the high net worth business. It's a great symbiotic relationship. I don't know how to put any kind of, any kind of metric on the delta variant of coronavirus.

We've largely been coming back in here in New York. Most of our other offices are back in. And I'm not an epidemiologist or a doctor, so I hesitate to present any view on the delta variant and what that might mean. I guess, I would just say, so far, I'm not seeing that having an effect and I don't know whether to expect one or not.

Chris Sakai -- Singular Research -- Analyst

OK. All right. Well, thanks.

Rick Hough -- Chairman and Chief Executive Officer

You're welcome, Chris.

Operator

The next question comes from Christopher Marinac from Janney Montgomery Scott. Please go ahead.

Rick Hough -- Chairman and Chief Executive Officer

Hey, Christopher.

Scott Gerard -- Chief Financial Officer

Hey, Chris.

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

Hey. Good morning.

Rick Hough -- Chairman and Chief Executive Officer

Good morning.

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

I just wanted to ask about the EBITDA margin as it relates to expenses. Would expenses kind of have any seasonality in the second half of this calendar year? And is the EBITDA margin kind of hold still the same as it has been?

Rick Hough -- Chairman and Chief Executive Officer

I'm going to let Scott answer that, Chris. I just want to give one color that I've consistently mentioned in the past, which is that I do believe that this EBITDA margin is on the high end, slightly different market reaction against our fixed costs could pull that down just a bit. And historically, we have hit this EBITDA margin when we had performance fees at the end of the year. We don't project those or budget around them.

But effectively, what it means is that we've got cash to hire additional portfolio managers and make investments in the business. I fully intend to do that. And regardless of the reasons for why it's 31.5 right now, which I'd like Scott get into, I do want to use that healthy cash flow to invest in new intellectual capital in business as we have consistently done so we can grow the high net worth future into the future. I just have not had -- excuse me, the high net worth business into the future.

I have not had really compelling recent hires that I want to make during the lockdown. And we also hired some people just before the lockdown. I think it's important to give them an opportunity to integrate into the firm the best they could in this environment and to make progress. We're still a boutique firm, a small firm, and we're going to make our personal selections very, very carefully.

Scott?

Scott Gerard -- Chief Financial Officer

Yes. A couple of things to think about for the second half of the year. Obviously, travel and entertainment expense has been running low as the environment gets back to normal or at least closer to normal. I would expect travel and entertainment expense to go up.

Other things that impact year-end, here we typically have some various year-end-related G&A expenses. If you think about the professional fees line or implied in our G&A as we get into interim order procedures toward the end of the year and on Deloitte spend significantly more time with more in-depth procedures, we tend to incur more expense related to that. So those are a couple of highlights and things to think about as we get to the second half.

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

Great. And then just a quick follow-up. I mean as you're now $31 billion of AUM, does the law of large numbers kick in so that the organic growth rate just backs off a little bit? Or just kind of curious how you think about that.

Rick Hough -- Chairman and Chief Executive Officer

It's obviously -- even when you have a strong nominal flows, your organic growth rate ticks down. If you strip away, and a lot of the business and look at ultra-high net worth businesses in general around the U.S., boutique, RIAs, they really struggled to have an organic growth rate, quite frankly, which is one of the issues with what I see in the M&A market. I think I can grow something fantastic. You have to see the path to do that and a lot of businesses haven't reinvested in personnel or their networks in order to do so in a referral-based business.

We've always been able to maintain that, but the industry is growing. But when you look at an individual firm, they're very often quite flat or very low-single digits. I think you're familiar with that phenomenon. We have consistently been on the higher end of that when you compare us to peer firms, ex-acquisitions, ex-inorganic growth.

It's definitely come down just because of the size of the base as you pointed out. But with the investment in new personnel and also the visibility of the firm, you can also drive some additional referrals and business that you didn't get before. So I haven't changed my outlook on the organic growth. I'm still pretty bullish on it.

And then that was just tying up the high net worth side of the business. We have a very, very healthy pipeline on the other side on the institutional business, which would lead to compelling organic growth numbers.

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

Great, Rick. Thank you both very much.

Rick Hough -- Chairman and Chief Executive Officer

Yes. Sure. You're welcome.

Operator

The next question is a follow-up from Sumeet Mody from Piper Sandler. Please go ahead.

Sumeet Mody -- Piper Sandler -- Analyst

Hey. Thanks for taking the follw-up. It's actually a follow-up. Just a follow-up on the hiring commentary.

Rick Hough -- Chairman and Chief Executive Officer

Yes.

Sumeet Mody -- Piper Sandler -- Analyst

I just wanted on a high level, between asset and wealth management more broadly, we're seeing reports from both bracket firms sort of increasing base pay and the journal article a couple of days ago highlighting retention issues and increased competition for talent and tech as we emerge from the pandemic. And I appreciate you guys are more small compared to those comps. But have you found that conversations with potential targets are different than pre-pandemic or experience any shifts from current employees?

Rick Hough -- Chairman and Chief Executive Officer

No.

Sumeet Mody -- Piper Sandler -- Analyst

OK.

Rick Hough -- Chairman and Chief Executive Officer

I have to say in the conversations we have in the market, they're very similar. They have not shifted or changed. A lot of that commentary around the bolts-bracket firms are trading within their broker-dealers, people who are like baseball players and pre-agents who reup every five, seven, eight years. And we're just not in that game.

We know the market, and we, in fact, when we talk to targets, have a very compelling value proposition that we don't have to tweak. So no, it has not changed.

Sumeet Mody -- Piper Sandler -- Analyst

OK. Great. Thanks.

Rick Hough -- Chairman and Chief Executive Officer

Yes.

Operator

And the next question is a follow-up from Sandy Mehta from Evaluate Research. Please go ahead.

Sandy Mehta -- Evaluate Research -- Analyst

Yes. Just one quick follow-up. In terms of the new hires, are you looking possibly at some new strategies? I know you have the hires and the new growth strategy on January of this year, but any other possibilities in terms of new product strategies going forward? Thank you.

Rick Hough -- Chairman and Chief Executive Officer

Yes. You're welcome. No. I would say that this is going to be more -- any of our future hires, just as the hires we make just pre-pandemic, are going to be more focused on the core high net worth business and/or managing that business for growth as we get to be a larger firm with more personnel.

I think for now, on the product side for whether it's equity or fixed income, we're in a really good position. Some of our specialized fixed income has done well and might grow by a person or so. It's not a needle mover. This is really about the high net worth business.

We need to make hay with the capabilities that we have and make those a success before we try to expand further. And frankly, we have a very good suite of capabilities that we like. And we're not going to try to do it all. We're going to try to do what we can do well.

So high net worth is where the focus is, at least for the hires when we get around to that.

Sandy Mehta -- Evaluate Research -- Analyst

Great. Thank you.

Rick Hough -- Chairman and Chief Executive Officer

You're welcome.

Operator

There are no more questions in the queue. This concludes our question-and-answer session. I'd like to turn the conference back over to Rick Hough for any closing remarks.

Rick Hough -- Chairman and Chief Executive Officer

Well, thanks very much for the good questions and the discussion this morning about Silvercrest and the second quarter and of course, the first half of this year. We look forward to talking to you in three months or so to discuss the third and plan for the business. Thanks so much.

Operator

[Operator signoff]

Duration: 33 minutes

Call participants:

Rick Hough -- Chairman and Chief Executive Officer

Scott Gerard -- Chief Financial Officer

Sumeet Mody -- Piper Sandler -- Analyst

Sandy Mehta -- Evaluate Research -- Analyst

Chris Sakai -- Singular Research -- Analyst

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

More SAMG analysis

All earnings call transcripts