RCS Capital Corp (RCAP) CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.26.13 | About: RCS Capital (RCAP)

RCS Capital Corp (NYSE:RCAP)

Q2 2013 Results - Earnings Call Transcript

July 25, 2013 11:00 AM ET

Executives

Nicholas Schorsch - Chairman

William Kahane - Chief Executive Officer

Brian Block - Chief Financial Officer

Analysts

Chris Ross - JMP Securities

Operator

Good morning and welcome to the RCS Capital Corporation second quarter earnings call and webcast. All participants will be in listen-only mode. After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Mr. Nicholas Schorsch, Chairman of RCS Capital Corporation. Please go ahead.

Nicholas Schorsch

Thank you operator, and good morning everyone, and thank you for participating in RCS Capital Corporation's first investor call as a public New York Stock Exchange listed company. Today we will discuss the company's second quarter 2013 financial results. But before we begin I would like to briefly update you on the company and explain why we are so excited with our progress to-date. And later in the call, you would hear from William Kahane, our Chief Executive Officer; Brian Block, our Chief Financial Officer who will describe in great detail the activities and the financial performance of the company.

Do keep in mind we will make certain comments that may be considered forward-looking statements under federal securities law during this call. The company's actual and future results may differ significantly from the matters discussed in any such forward-looking statement.

RCS Capital Corporation, which we will refer to as RCS Capital, or RCAP, successfully completed its IPO in June. It has been an exciting and fast paced couple of months. We're able to celebrate our IPO in late June by ringing the bell at the opening of the New York Stock Exchange, and more importantly, we're extremely pleased to see each of our individual operating divisions execute its respective business plan.

Each unit is on pace to exceed 2013's expectations and our financial projections bottom line which I guess for the first half of the year that we recently just completed, we established 2013 consolidated earnings guidance of pretax $3.96 per share to $4.53 per share. This is over 70% greater than what was anticipated in our free running prospectus at the time of our IPO.

As part of our long-term strategy to expand our financial service footprint in strategic and meaningful ways, RCAP has identified a number of strategic acquisitions that are complementary to our existing business lines and product offerings. We're actively evaluating these acquisition targets. The current environment continues to present a unique climate for consolidating financial service businesses.

Adding to our suite of investment products and attracting talented senior professionals focused on helping management grow our platform and product offerings has also been a paramount focus for us.

Before turning the call to Bill to discuss our consolidated operating business and business lines, I would like to make an important acknowledgement to a significant milestone. Realty Capital Securities since 2009 has raised over $10 billion in a direct investment equity capital space. We currently have 41.6% market share in the industry, that's nearly 3.5 times the market share of our nearest competitor. I am confident RCS will continue to pave the way in a direct investment channel.

With that, I'd like to turn the call over to Bill. Bill?

William Kahane

Thank you, Nick, and good morning, everyone. Taking the helm as Chief Executive Officer of RCAP, I am delighted to be part of the outsized success the company has already achieved. RCAP has been constructed under premise that the direct investment industry is deserving of a full service investment bank focused on very unique set of requirements and challenges. These services include securities sales, transaction management, transfer agency, capital markets and financial advisory. We've quickly established our leadership position in providing these services to both our own products suite as well as third party sponsors.

It's now our intention to continue to build on that success and expand our business to service a greater number of unaffiliated best-of-class investment firms. Moreover as Nick has mentioned, we will take advantage of the numerous opportunities available to us to expand our distribution network and attract talented professionals to support this effort.

Whether it is by way of strategic business acquisitions attracting or developing new direct investments and alternative products or increasing revenues from existing lines of business, our singular focus will remain to grow this company strategically, systematically and deliberately to increase earnings and distributions per share and to maximize total shareholder return.

We are pleased to announce across the board outperformance by all of our operating units. Our financial results confirm the opportunity we early identified in the direct investment channel. Our rapid success in becoming the preeminent full-service investment bank in the industry is testimony to the timely implementation of this vision.

The operating units that comprised RCAP include our securities sales business, Realty Capital Securities, or RCS, augmented by our investment banking division, a transaction management group and a transfer agent. Briefly as it relates to these four divisions for the second quarter RCS revenue increased 4% compared to the prior quarter and a 178% compared to the second quarter 2012.

First half 2013 revenue totaled $433 million, an increase of 274% compared to the same period 2012. Our investment banking transaction management and transfer agent divisions began substantial operations in 2013. In this brief period, investment banking revenue totaled $8 million for the first half of 2013, an increase 28% in the second quarter 2013 compared to the prior quarter.

Transaction management revenue increased 4% compared to the prior quarter and first half 2013 revenue totaled $4.6 million and transfer agent revenue increased to 132% compared to the prior quarter with first half 2013 revenue totaling $3.4 million. Brian will discuss these numbers in more detail shortly.

Shifting gears to RCAP's strategic initiatives, we continue to evaluate growth opportunities to complement and permit us to expand or fortify existing business lines, expect us to pursue strategic acquisitions focusing on the direct investment industry. We have currently substantial firepower and flexibility to pursue our strategic objectives with cash on hand at June 30, 2013 of $84 million which includes IPO net proceeds to $45 million, we have no outstanding debt.

With that, I would like to turn the call over to Brian Block, who will walk us through the numbers for the quarter. Brian?

Brian Block

Thanks, Bill, and good morning to everybody. Let's look at our second quarter and first half of 2013 financial results as well as the outlook for the period ahead. We are pleased to report consolidated earnings for the six months ended June 30, 2013 significantly ahead of projections. And as Nick mentioned earlier, we are now establishing 2013 consolidated earnings guidance of between $3.96 to $4.53 per share on a pretax basis inclusive of non-controlling interest, that would equate to approximately $2.35 to $2.69 per share on an after-tax basis.

Looking at the second quarter revenues for the three months ended June 30 increased $150 million or approximately 186% to a record $230 million as compared to $80 million for the three months ended June 30, 2012. Revenues for the six months ended June 30, 2013 increased $332 million or 285% to a record $450 million as compared to the $117 million for the previous six months in 2012. This growth is driven by a substantial increase in sales and securities for direct investment programs as well as an increase in our M&A activity. Broker-dealer equity sales totaled $2.3 billion and $4.5 billion for the three and six months ended June 30, 2013 respectively surpassing management's 2013 year-to-date projections by approximately 40%.

Additionally during the second quarter, the number of broker-dealers on our national network selling our active direct investment programs increased by approximately 17% to 285 firms as compared to just 244 firms as of March 31, 2013. The aggregate value of M&A advisory assignments closed during the quarter was $2.3 billion as compared to $6.1 billion for the quarter ended March 31, 2013.

In addition, the total value of M&A transactions announced during the second quarter were not yet closed was approximately $5.3 billion. Consolidated RCAP net income before non-controlling interest was $27 million or $1 per share for the three months ended June 30, 2013 and approximately $53 million or $2.01 per share for the six months ended June 30, 2013.

Again, note that our consolidated results are inclusive of non-controlling interests. I think it's important to point out that RCAP net income after non-controlling interest was $200,000 or roughly $0.08 per share for both the three and six month ended June 30 2013, but again recall the timing of our initial public offering.

These results reflect only the 20 days of operations commencing in connection with our IPO through the end of this period, June 30. In regards to the individual business lines, wholesale broker-dealer activities within RCAP Securities, Realty Capital Securities revenues for the three months ended June 30, increased $141 million or 178% to $221 million as compared to $80 million for the three months ended June 30, 2012.

For the six months ended June 30, 2013, revenues increased $370 million or approximately 274% to $433 million compared to $160 million for the six months ended June 30, 2012. For our three other lines of business, we compare the sequential quarter rather than the prior year due to the limited or zero activity as they weren't in existence in the prior period 2013.

So, turning to investment banking. The revenues for the three months ended June 30, totaled $4.5 million, an increase of 28% compared to first quarter of 2013. Revenues for the six months aggregated approximately $8 million.

Transaction management revenues for the three months totaled $2.4 million, an increase of 4% compared to the three months ended March 31. Revenues for the six months ended June 30 totaled $4.6 million.

Our transfer agency business, revenues for the three months ended June 30, 2013; totaled $2.4 million represents an increase of 132% compared to the three months ended March 31.

Revenue for the six months ended June 30, totaled $3.4 million. Beginning of March 2013, the services performed by third-party vendors began transitioning to our transfer agent. This insourcing is expected to be completed during the third quarter of 2013.

Furthering our objective to provide superior service to our programs and generate profitability and future growth for this operating unit. When this insourcing is completed, we expect a significant reduction of third-party transfer agent expenses.

Together with the third-party vendor, our transfer agents service approximately 158,000 accounts during the three months ended June 30 that compares to roughly 140,000 accounts during the three months ended March 31.

With that, I'd like to turn the call back over to Nick and Bill. So they conclude our call and then address any questions that the audience may have.

Nicholas Schorsch

Thank you, Brian. As you have just heard, we are extremely positive, we had an extremely positive second quarter, and we are extremely positive about the future result in the continuity of this business. We could not have been more pleased with our operating performance and our earnings growth. We've exceeded revenue and net income forecast provided in connection with our June IPO and on the basis of our market outlook established in 2013 earnings guidance that then the ability to deliver guidance at this point we feel very comfortable with. Clearly, we are excited about the near and the long-term prospects for our company.

But I think we have to turn to another issue, which we haven't talked about yet, but I think we really have to dig in on it which is we are equally excited with the growth of our independent investment programs including (Inaudible) File 11, 0:09, UDF4 and Retail Centers of America. These programs are independently operated and the operators are not affiliated with our company. And coupled with our newest entrance, this is our global and our Realty finance unit. RCS is raising several hundred million dollars of month of equity for these best-of-class investment vehicles and we love the fact that this gives us more diversification and it also gives the investor, the ability to choose programs that are not just ones that are coming of our sponsored platforms.

The rapid traction in capitalization of these programs speaks volumes to the strictly applied underwriting standards that our investment bank uses, we call them best practices and they are numerous, whether it's elimination of fees or back ending of fees or elimination of internalization cost. But these measures are used on every offering as our underwriting standards by RCS.

We are leveraging our leadership position in direct investment industry to take advantage of the growth opportunities and we'll continue to consistently and deliberately and rapidly expand our platform and introduce new alternative investment products to the market on a regular basis.

We've also recently launched our open end fund which is now available over 16,000 advisers throughout the Schwab and the purging platforms. So thank you very much for your time today and your interest in RCAP.

Operator, let's open up to Q&A please.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from Chris Ross of JMP Securities.

Chris Ross - JMP Securities

I just have a couple of questions, so the first one relates to your guidance and just kind of what goes into the mechanics of your outlook and what kind of pipeline you have, visible pipeline you have into upcoming equity subscriptions and equity fund raising?

Nicholas Schorsch

Brian, do you want me to jump it on that and you can go back to details of the guidance.

Brian Block

Certainly.

Nicholas Schorsch

Well, okay. so let's just get talk about Chris, we obviously see a very, very strong pipeline and as you know in the direct placement business these are very repeatable and easy to certain numbers, but one wild card that we really can't tell you as we are seeing a pretty substantial growth because it continuous to be more and more recycled capital coming into the market and that additional capital is coming in from the roughly $20 billion of liquidity that's been created over the last 12 months from other alternative programs is continuing to drive growth and some of that growth is a little bit harder to predict.

So based on our current numbers, we are kind of seeing the year about $10 billion raised for our platform alone which is almost as much of the entire industry raised last year, but that number could go higher and it could go substantially higher for our platform. So we are very confident with our numbers continuing at the level they are to or growing but we can't tell you how much they'll grow other than the fact that we are capable of taking the capital in by having so many different products it allows it to not be over concentrated to anyone of our sponsor entities even the whether the independent or our own sponsor entities.

And that really adds value as far as the ability for our systems to be able to maintain it and I think Brian touched on it, the transfer agency business is really a service business and it allows a higher level of service and a higher level of touch for those advisors which also differentiates our programs from other programs because they get a higher touch service and a lot of times they need that for their retail investor base and I think that's a real value add. It's a profitable business for us but more than that it's a retention and allows for the broker-dealer systems and the individual advisors to have better and more repeatable service.

Chris Ross - JMP Securities

That's very helpful. Do you happen to have any metrics around the recycling of capital from some of the programs that have gone liquid and in terms of reinvesting in some of the new programs?

Nicholas Schorsch

We can give you general understanding of that simply because when you look at where those programs really sit the ones that do well this is a vanguard or inflection point through this industry. Many of the programs the prior legacy programs that have existed with other sponsors have done less than well and they've returned less than 100 cents on the dollar and those programs typically don't get a lot of their own money back because of prior performance issues.

In our case, we tend to be the net beneficiary from those programs to be close our programs and because of our detailed underwriting and the investment banking process that we go through for any of our sponsor products, whether it's ours or the independent ones, our programs have performed exceedingly well and so we tend to get a larger percentage of that. So in a program that's recycling, that's coming from our platform.

So I want to differentiate that for you, Chris. Once they've done well at a premium or at par to original investments plus return to capital in the neighborhood of 6% to 10%, those deals tend to recycle mostly to the original sponsor and in our case, we've had about between the four programs that have gone full cycle or are going full cycle, almost $8.5 billion that has or is being currently held in liquid form, which they have the opportunity to choose, whether they want to do something or stay in that space.

The programs that have had less success that our legacy sponsors of other platforms, that money tends to drift away from them and the investors have been locked up for three, four, five, 10 years in some cases. They tend to, we tend to see a lot of that money coming on our way.

For some of our newer generation programs which we mentioned or we see them coming for some of our older generation repeat programs, which have a track record of performance. So performance is actually really the number one driving factor in any alternative or whether it's us or whether it's Blackstone or whether it's any sponsor platform, those are the kind of things that really drive it. So I would say we see probably of every dollar that we cycles about 50, 55% of that money coming towards our platform in form or another.

Chris Ross - JMP Securities

That's great. My last question relates to your backlog financial advisor relationships, I think, correct me if I am wrong, you mentioned 285 firms up from 244, can you give us a sense of kind of it is the seasonality or how this quarter shaking up?

Nicholas Schorsch

No, there's no seasonality at all these are long term selling agreements. We end-up we've had a net add of about 45, I think Brian gave you that number that has been a very positive impact, we still have and Bill you could, maybe want to comment on this, I think we still have about 100,000 active financial advisors 80,000 to 100,000 financial active advisors everyday that are series 7 licensed in our alternative product class only.

Obviously, the [wirehouse] products the open end funds can be sold by anybody, it's a [QCIP] based traded product it has ticker symbol, I'm talking really only about the alternatives that number, Bill, it's pretty steady around 80,000 to 100,000?

William Kahane

It is, Nick, that series seven license that we are able to sell our equity securities at any point in time.

Chris Ross - JMP Securities

Okay. Thanks very much guys that's it from me.

Nicholas Schorsch

Thank you.

Operator

And our next question comes from [Daniel Roth Fortitude Investment Group].

Nicholas Schorsch

Hi, Daniel.

Unidentified Analyst

Hi Nick, hi Bill, thank you for taking the call.

William Kahane

Good morning.

Unidentified Analyst

And congratulations on the stellar results.

William Kahane

Thank you.

Unidentified Analyst

The one question I have is how do you guys intend on adding some volume liquidity to the stock and therefore hopefully driving more institutional ownership.

Nicholas Schorsch

Well, that's obviously a focus for us on the long term basis. We obviously have the ability to acquire assets, we have to deploy the capital we have, which we as I mentioned and Bill mentioned that we have a robust pipeline of acquisition target and with that, that will allow us on an accretive basis. Obviously, we like to do things that are accretive to earnings and obviously, the companies and the platforms that we're looking at acquiring or and the new business development opportunities that we can generate ourselves.

The combination of those things should in every way be accretive both in sales, volume, and revenues as well as diversification. And in doing so, we can issue equity along the way and we can also show earnings growth in addition to the organic growth that we have now. So our idea simply is growth, it's not growth at any price, it's growth at a profitable level through acquisition and additional equity ratios as we go.

Unidentified Analyst

Okay. And the last question I have for you is do you guys have any intention and any foresight on raising your dividend?

Nicholas Schorsch

The Board has not addressed that issue at this point and I think Bill may want to speak to this. But I think we've been very carefully -we are very prudent and deliberate on what we do. So we felt it was critical to be able to give the market at least this quarter of visibility on what we're doing, before we start to ratchet the dividend upward. And I think it was very, very important that we were able to announce some good clarity today and I think Brian did a really good job outlining it. But, Bill you may want to comment on just the obviously long term outlook which would drive dividend?

William Kahane

Briefly speaking the value of an increasing dividend is not lost either on the management nor is it lost on the board. The opportunity to grow earnings commensurately to increase the dividend is something we will both as a management team and as the board immediately consider.

We think there is enormous opportunity getting back to your first question to use a strong share currency to be able to build out our platform strategically whether it be distribution, augmenting lines of business or adding new investment products and solutions and commensurately teams to operate those businesses and manage those investments. But enough of it is we've built a substantial enterprise then rationalized it by taking it together with, it's a tendon part, banking capital markets and security sales onto the exchange purposefully.

But we've built our broader enterprise on the back of growing our dividend base for our shareholders. So I want you to leave this question with the complete knowledge that we will consider as our earnings grow commensurately asking some of that benefit on in the prudent way, looking always that coverage and growing our dividend as well.

Unidentified Analyst

Thank you very much, guys. Keep up the great work.

William Kahane

Thank you.

Nicholas Schorsch

Thank you.

Operator

(Operator Instructions)

I'm showing no further questions. I would like to turn the conference back over to management for any closing remarks.

William Kahane

Nick, would you like to close?

Nicholas Schorsch

Sure. Well thank you everybody for joining us and I think I would speak for -- on behalf of all the management. We think this business has proven great sustainability, great diversification. We are most pleased with the emergence of our three operating divisions as profit centers each in their own right and that helps drive repeatable and recurring revenue.

We also are very pleased with the unusual and outsized performance of our independent products on our platform which we think really demonstrates the ultimate strength of the independent channel and the idea of offering independent products as well as sponsored products and allowing the investor to have the maximum diversity that it needs to make choices for the best investment portfolios.

We think by delivering that consistently and repeatedly we stand ahead of other programs and other sponsors that are in the marketplace whether that be the institutional ones or the alternative programs and that allows the investor to have a choice of one platform which really differentiates our company and will for decades to come. So thanks everybody for joining us today and we look forward to next quarter and have a great day.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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