Silvercrest Asset Management Group (SAMG) Q3 2021 Earnings Call Transcript

Silvercrest Asset Management Group (SAMG 3.40%)
Q3 2021 Earnings Call
Nov 05, 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. Q3 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. These factors are disclosed in our 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 the 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

Thank you very much, and thanks for joining us for our third quarter update of 2021. We're pleased to report strong financial results for the third quarter despite anemic markets and institutional rebalancing during the quarter. The firm's discretionary assets under management, which drives revenue, increased 25% and year-over-year. Commensurate with that increase, Silvercrest concluded the quarter with $33.5 million of revenue and quarterly adjusted EBITDA of $10.3 million, representing year-over-year increases of 23.1% and 27.4%, respectively.

Our adjusted diluted earnings per share increased 25.7% year-over-year to $0.44 per adjusted diluted earnings per share. Silvercrest sought to achieve $1 billion in AUM with its relatively new outsourced chief investment officer capability by the end of 2021. We are pleased today to report that the OCIO business now has $1.1 billion in assets under management. We have a strong new business pipeline of opportunities and crossing this AUM threshold will be helpful to building that business.

Our new business opportunities continue to grow thanks to continued strong relative investment performance for high net worth and institutional clients alike. During the third quarter, Silvercrest repurchased approximately 27,000 shares of Class A common stock for approximately $400,000 pursuant to its previously announced share repurchase program on July 28, 2021. On November 2, the company's board of directors declared a quarterly dividend of $0.17 per share of Class A common stock, which represents an annual yield of approximately 4.1% based on the closing price of the company's Class A common stock on November 3, 2021. The dividend will be paid on or about December 17 to shareholders of record as of the close of business on December 10.

With that, I'll turn it over for Scott Gerard, and then we look forward to conversation.

Scott Gerard -- Chief Financial Officer

Thank you, Rick. As disclosed in our earnings release for the third quarter, discretionary AUM as of September 30 this year was $22.5 billion, and total AUM as of the same date was $31 million. Revenue for the quarter was $33.5 million and reported consolidated net income for the quarter was $6.4 million. Looking at the quarter a little bit more detail.

Revenue, again, was $33.5 million, representing approximately a 23% increase over revenue of approximately $27.2 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 third quarter were $25.3 million. This represented approximately a 14% increase from expenses of $22.2 million for the same period last year.

This increase was primarily attributable to an increase in comp and benefits expense of $3.6 million, partially offset by a decrease in G&A expense of $0.6 million. Looking further at compensation. Again, it increased by $3.6 million or approximately 24% to $18.8 million for the three months ended September 30 of this year from $15.2 million for the three months ended September 30, 2020. The 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 non-qualified stock options outstanding.

G&A expense decreased by $0.6 million or approximately 8% to $6.5 million for the three months ended September 30 this year from $7.1 million for the third quarter of 2020. This was primarily attributable to decreases in the fair value adjustment to the contingent consideration related to the Cortina acquisition of $1 million and occupancy and related costs partially offset by increases of portfolio and systems expense and depreciation and amortization. Reported consolidated net income was $6.4 million for the quarter, as compared to $3.5 million in the same period last year. Reported net income attributable to Silvercrest or to Class A shareholders for the third quarter of this year was approximately $3.7 million or $0.38 per basic and diluted Class A share.

Adjusted EBITDA, which we define as EBITDA without giving effect to equity-based compensation expense and non-core and non-recurring items was approximately $10.3 million or 30.9% of revenue for the quarter, compared to $8.1 million or 29.9% of revenue for the same period last year. Adjusted net income, which we define as net income without giving effect to non-core and non-recurring items, and income tax expense where we assume a corporate rate which is blended of 26% was approximately $6.6 million for the quarter or $0.46 and $0.44 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 add unvested restricted stock units and non-qualified stock options to the total shares outstanding to compute diluted adjusted EPS.

Looking at the nine months ended September 30, revenue was approximately $97.8 million, and this represented approximately a 23% increase over revenue of approximately $79.6 million for the same period last year. Again, this increase was driven primarily by market appreciation, partially offset by net client outflows in discretionary AUM. Expenses for the nine months ended September 30 of this year were $76.6 million, and this represented approximately a 26% increase from expenses of $16.6 million for the same period last year. The increase was attributable to increase in comp and benefits expense of $10.7 million and G&A expense of $5.3 million.

Comp and benefits increased by $10.7 million or 24% to $54.9 million for the nine months ended September this year, compared to $44.2 million for the same period last year. The increase was attributable, again, to increases in the accrual for bonuses, salaries and benefits expense primarily as a result of merit based increases, and newly hired staff, and increased equity-based compensation. General and administrative expenses increased by $5.3 million or approximately 32% to $21.7 million for the nine months ended September 30 this year from $16.4 million from the same period last year. This was primarily attributable to increases in the fair value of contingent consideration relation to the Cortina acquisition of $5.1 million, trade errors, professional fees, sub-advisory and referral fees, and insurance expense, partially offset by decreases in travel and entertainment expense, portfolio and systems, and depreciation and amortization.

Reported consolidated net income was $16.4 million for the nine months ended September 30 this year, compared to $14 million for the same period last year. Reported net income attributable to Silvercrest for the nine months ended this year was approximately $9.6 million or $0.99 per basic and diluted Class A share. Adjusted EBITDA was approximately $30.4 million or 31.1% of revenue for the nine months ended September 30 this year, compared to $23 million or 20.9% of revenue for the same period last year. Adjusted net income was approximately $19.5 million for the nine months ended September 30 of '21, or $1.35 and $1.31 per adjusted basic and diluted earnings per share, respectively.

Looking quickly at the balance sheet, total assets were approximately $212.9 million as of September 30 of this year, compared to $213.8 million as of the end of last year. Cash and cash equivalents were approximately $65.9 million at September 30, and as compared to $62.5 million at the end of last year. Total borrowings as of September 30 of this year were $9.9 million. Total Class A stockholders' equity was approximately $75.5 million at September 30 of this year as well.

That concludes my remarks. I'll now 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 have a discussion and answer some questions. Thanks.

Questions & Answers:

Operator

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

Sumeet Mody -- Piper Sandler -- Analyst

Good morning, guys. Just wanted to start on the OCIO business. It's really great to see that AUM has kind of crossed over that $1 billion threshold. Maybe at a high level, could you just give us some color around what size this business could reach over the next couple of years now that you reached the inflection point with the current infrastructure in place? What's -- just trying to get to where the capacity for growth is with kind of what you have, and then when do you consider adding more heads or more hires in that area to accelerate growth even more?

Rick Hough -- Chairman and Chief Executive Officer

Right, right. Good question. Thank you. It is a more leverageable business in some respects than the high net worth business.

It kind of sits in between pure institutional equity mandates where there is a substantial amount of leverage inherent in those capabilities versus high net worth, which is a very client service-driven business. The OCIO business sits a bit in between because we are taking an approach where we partner with the organizations that we are managing money for. And they're doing a lot more on a discretionary basis than many other consultants who may have a single model, an endowment like model that they're distributing to their OCIO clients. So our capability is a little bit more personnel heavy.

That said, we've built out the team, and there's a lot of capacity there. To answer your question, I'd like that business to be a few billion dollars. I think we can do that. If we added any personnel there, it would likely to be pretty low-level support-type roles, not expensive portfolio management roles.

I feel that we've got plenty of room to grow on the portfolio manager lead, sort of PM side of that business. There's also occasionally the situation where a high net worth portfolio manager will serve as a lead on behalf of an OCIO client. So there's other capacity at the firm to deal with those clients. So long story short, lots of capacity.

I'd like to see it be a few billion-dollar business over the next couple of years.

Sumeet Mody -- Piper Sandler -- Analyst

OK. Great. Thank you. That was helpful.

Just wanted to kind of shift gears toward the kind of international expansion as well through Neosho. I know they have a small-cap international strategy that was kind of expected to reach a few billion in AUM over a few years. So now that we're a couple of years into that, can you just maybe update us on how things are going there and the progression?

Rick Hough -- Chairman and Chief Executive Officer

Sure. I've never given a target for that team at all. So I don't know where the confusion is there. That is a strategy that we said that we had to incubate for two to three years, bring to the market to familiarize people with it.

That effort is going very strong. We've built out the marketing team. It's still quite a small effort. I haven't given any targets there, and it won't be for some time.

They did have some nice new inflows in the third quarter, and their performance has been picking up. So that's really all the color I can give you at this time.

Sumeet Mody -- Piper Sandler -- Analyst

OK. Great. Thanks. And then last one from me on the discretionary AUM flows in the quarter.

Can you just break down that $234 million net cash outflow number for us? So was there any tax-related impacts, or was that kind of that institutional rebalance that you mentioned?

Rick Hough -- Chairman and Chief Executive Officer

Yeah. So yes, of course, that's a net number. And the total rebalancing that you saw in those -- that created outflows in that number across the institutional product base was approximately $300 million. So that was a pretty heavy headwind.

On the other hand, it was primarily rebalancing. There was one lost account, not huge, that hurt a bit. It was also a very high good performing strategy. That said, $300 million in rebalancing is tough to overcome.

That's just the nature of the business. It's not something where we feel we need to pay a lot of attention to. When people have great gains, they're going to rebalance in their portfolio. So not an issue there.

There was also some tax outflows for estimated taxes that were coming up in October. But I think the big story there is just rebalancing. And we're going to see that from time to time with strong performance. We'll make it up with new mandates over time as we've proven to do in the past.

So there's -- you want more color, maybe I can provide it, but that's the best I can do.

Sumeet Mody -- Piper Sandler -- Analyst

Perfect. All right. Thank you, and I'll hop back in the queue.

Operator

Next question comes from Sandy Mehta with Evaluate Research. You may go ahead.

Sandy Mehta -- Evaluate Research Ltd. -- Analyst

Good morning, Rick and Scott. Just following up on the prior question about rebalancing, perhaps if you could comment a little bit further. The markets have gone up. Are you seeing rebalancing away from equities and is it rebalancing within other fixed income products, other Silvercrest fixed income strategies? Or is it money that's moving away? Any further comments?

Rick Hough -- Chairman and Chief Executive Officer

So the rebalancing is really the institutional clients rebalancing their own asset allocation. So as we grow and we have a certain percentage slot for the strategies we may be running, they're just bringing it back in line with what their desired targets are. We don't have much institutional fixed income. That's more driven by the high net worth business and isn't really worth commenting on at least with regards to this.

This is purely a phenomenon that you see from time to time in the institutional business as a result of growth. Where those institutional players are rebalancing to, I don't have a lot of insight into.

Sandy Mehta -- Evaluate Research Ltd. -- Analyst

OK. And one final question. Any further color -- you talked about the OCIO pipeline and the outlook, any further color on the institutional pipeline in terms of finals or high-value prospects? Thank you.

Rick Hough -- Chairman and Chief Executive Officer

Yeah. You're welcome. Yes. I didn't mention the pipeline in OCIO.

It's approximately $600 million right now. We're really proud that we crossed that $1 billion threshold because larger clients want to see that you have a critical mass of assets in the management. That's the significance of that. So it's nice to be a bit ahead of schedule than what we had planned.

We also have a significant number of assets that are just outside that actionable pipeline in OCIO. Very warm opportunities, but we're not confident enough yet to counting in the pipeline. With regards to the institutional equity pipeline, that has increased, and it's about $1.16 billion, almost $1.2 billion. And that pipeline has been increasing throughout the year.

It's up from the end of the second quarter. Honestly, I would have hoped that a little bit more of it came into our hands during the third quarter. But the fact that that pipeline is intact and growing speaks to pretty well the future growth and has been a great indicator because it's a very conservatively measured pipeline. Final piece is, of course, our business is very significantly high net worth.

And there's no question that there were disruptions organically building that business through the COVID period. I'm seeing the activity there picking up. PMs that we've hired just before COVID are getting some great opportunities. And so we expect that to start looking a bit better as well.

We don't have a pipeline in there. It's not a business that's as easily measurable. But I do look at marketing activity, and I feel pretty good about where that business sits.

Sandy Mehta -- Evaluate Research Ltd. -- Analyst

Great. Thank you.

Operator

Our next question comes from Christopher Marinac with Janney Montgomery Scott. You may go ahead.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Thanks. Good morning, and I appreciate you hosting the call for all of us. I wanted to ask just leveraging your comments, Rick, on the kind of COVID era and reopening, does that have an impact on the EBITDA margin going forward? And then one of your general thoughts for the EBITDA margin looking at the next year?

Rick Hough -- Chairman and Chief Executive Officer

Yeah. Because we have been -- it has been increasing. It's been helped a bit by that, of course, because T&E is down and has been down. And as we're investing in the business, we tend to come back down under 30%.

My own -- we don't give guidance but my own sense I'll just say this is that that margin is going to be relatively maintained over the near term. T&E and some of those related things are slowly ramping up. But -- and not to the extent that all of a sudden we're going to drop down to 29% or 27% or something. We'll see.

I want the T&E, right. So I don't mind doing that. And of course, as things open up more, and we see more high net worth business development, I could well be investing in another PM or two, which would have an effect as well. But right now, I see marginal effects as we slowly reopen.

You can expect to -- still expect a fairly elevated EBITDA margin. Whether that's 30% or 31.5% or just above 29%, I can't tell you, I don't know, but certainly higher than if you look across the history of the firm. I hope that's enough color.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

No, that's great. I appreciate that. And I guess my next question was kind of high level. Pricing seems to have really -- your debts even stronger in recent quarters for the business, and I'm sure you're seeing that on any M&A discussions.

I'm curious kind of where we -- you think we are from a secular standpoint of pricing? And does that impact kind of where you see the company in the future?

Rick Hough -- Chairman and Chief Executive Officer

Yeah. I mean, it's -- we've talked about this theme of making really good use of shareholder capital to do accretive deals for these cash-heavy businesses often with slow-growing organic capabilities and potentially declining revenue stream. It's still very expensive out there. I -- as interest rates potentially normalize -- it's hard to use the term normalize when we've had interest rates this low for so long.

But as that occurs, I do see more opportunities long term. But keep in mind as well, this has never been a roll-up company. And the kind of additions that we're looking to make are going to be people who have a lot of priorities in addition to the absolute value of the business. So we're always in conversations.

We don't know when one of them might come to pass. Obviously, given the opportunity set, that's one reason why we pivoted toward buying what we think is the best asset management group in the space out there, which is ourselves. And so, we're going to pay attention to being able to buy ourselves back with that buyback as we wait for use of our capital, and we'll invest in the business organically, which is why I was talking about hitting EBITDA. I may have been a bit slow in doing that over what was planned because of COVID, right.

I want to make sure that we're firing on all cylinders as we get out and travel more. And we give an opportunity for the investments we've made whether that's OCIO or new high net worth managers to organically grow the business. And so, you put those things in the mix and acquisitions are going to be additive. But long term, yeah, if things do regress to the mean and we'll just wait for our opportunities.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Great, Rick. Thank you, and Scott for this morning. I appreciate it.

Operator

[Operator instructions] Our next question comes from Chris Sakai with Singular Research. You may go ahead.

Chris Sakai -- Singular Research -- Analyst

Hi, good morning. I've just got a question -- a broad question. Approximately, do you have a breakdown as far as your AUM as far as how much is it -- what's the breakdown for AUM for composite and -- or small -- or large bid and small? Do you have a breakdown along those lines?

Rick Hough -- Chairman and Chief Executive Officer

Yeah. So we're all separately in aged accounts, which means each of our strategies had a composite that we can market. And I don't have that right in front of me. It's in all of our filings, I'm sorry.

It's not a question I usually get. I kind of have to dive into the footnotes here where we'll reshow the composite across the board. But generally speaking, yes, this business is 70% high net with 30% institutional with our largest composite being in small-cap value. But I don't want to give you ballparks.

It's in our filings.

Chris Sakai -- Singular Research -- Analyst

OK. Great. Let's see. And then the other question I had, I guess people have already asked, but what's sort of driving the net client outflow? Was it the rebalancing you're saying?

Rick Hough -- Chairman and Chief Executive Officer

Yeah. The net client -- it wasn't client outflow because it was just some assets of clients that we have. We kept our clients. It's just people rebalancing away from the strategies they invested in here as part of their total portfolio.

Often, let's say they had a target of, I'm just going to make up a number, 10% in a particular kind of strategy. If it grows to 12% or 13% or whatever it is, they're going to withdraw some money to get back to their target allocation for their own pool of funds.

Chris Sakai -- Singular Research -- Analyst

OK. For your -- I know this is kind of a high-level question, but on your accounts, are they -- would you say they're really performance-based? The reason why I ask is, so say your composites don't meet the index performance, are you going to see more of an asset outflow because of that?

Rick Hough -- Chairman and Chief Executive Officer

Well, we don't have performance-based fees for any of our capabilities. We have fee on assets under management for our advisory services. As with any institutional manager working with clients, let alone the high net worth, if you underperform for a sustained period of time, you will lose clients, no doubt. It's a very competitive market, which most of the people on this call understand well and are also in the business, but our strategies have very strong sustained long-term performance.

So I don't see that as a high-risk right now.

Chris Sakai -- Singular Research -- Analyst

OK. Great. Thanks.

Operator

We will now take a moment for any lasting or follow-up questions. [Operator instructions]

Rick Hough -- Chairman and Chief Executive Officer

OK. Well, thank you very much for joining us. It seems like there aren't any other questions at the moment. Appreciate you hearing about our results for the third quarter of 2021.

Despite some rebalancing out of the accounts, we had very strong financial results. And certainly, it's very strong growth over the past trailing 12 months. And -- but most importantly, we have a very strong pipeline of new business, potential opportunities across high net worth, the institutional business. And as we previously discussed across the very important $1 billion threshold in the OCIO business ahead of schedule.

Thanks so much for joining us. We look forward to talking to you all soon.

Operator

[Operator signoff]

Duration: 30 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 -- Analyst

Chris Sakai -- Singular Research -- Analyst

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