Och-Ziff Capital Management Group's CEO Discusses Q1 2014 Results - Earnings Call Transcript

May. 2.14 | About: Och-Ziff Capital (OZM)

Och-Ziff Capital Management Group LLC (NYSE:OZM)

Q1 2014 Earnings Conference Call

May 2, 2014 08:30 a.m. ET

Executives

Tina Madon – Managing Director and Head of Investor Relations

Daniel Saul Och – Founder, Chairman, Chief Executive Officer, Executive Managing Director, and Chairman of Partner Management Committee

Joel Martin Frank – Chief Financial Officer, Senior Chief Operating Officer, Principal Accounting Officer, Executive Managing Director and Director

Analysts

Daniel Fannon – Jefferies

William R. Katz – Citigroup Inc.

Kenneth B. Worthington – JP Morgan

Robert Lee – KBW

Cynthia Mayer – Bank of America Merrill Lynch

Patrick Davitt – Autonomous Research

Operator

Good morning, everyone, and welcome to the Och-Ziff Capital Management Group 2014 First Quarter Earnings Conference Call. My name is Janita, and I will be your operator for today. (Operator instructions) I would now like to turn the call over to Tina Madon, Head of Investor Relations at Och-Ziff. Please proceed.

Tina Madon

Thanks, Janita. Good morning, everyone, and welcome to our call today. Joining me are Dan Och, our Chairman and CEO; and Joel Frank, our Chief Financial Officer and Senior Chief Operating Officer.

As a reminder, today's call may include forward-looking statements. Among other things, these statements reflect management's current view on assets under management, the capital flow environment, expense levels, financial performance, investment opportunities and strategic business priorities, many of which are inherently uncertain and outside of our control. Och-Ziff's actual financial results, investment performance and assets under management may differ possibly materially from those indicated in these forward-looking statements. Please see our 2013 annual report for a description of the risk factors that could affect our financial results and our business. The company does not undertake any obligation to publicly update any forward-looking statements whether due to new information, future developments or otherwise.

During today's call, we will be referring to economic income, distributable earnings and other financial measures that are not prepared in accordance with US GAAP. Information about and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available in our earnings release, which is posted on our website at www.ozcap.com. Furthermore, no statements made during this call should be construed as an offer to purchase shares of the company or an interest in any Och-Ziff fund.

Today's call is being recorded and is copyrighted material of Och-Ziff Capital Management Group LLC. Telephonic and webcast replays will be made available later today. You can find the details for both on our website.

With that, let me now turn the call over to Dan.

Daniel Saul Och

Thanks, Tina. Good morning, everyone, and thank you for joining us. This morning, I'll review our year-to-date performance and our assets under management. I will also update you on our capital flows and what we are hearing from our fund investors. Lastly, I will touch on the investment environment we are seeing. After that Joel will take you through our financial results, and then we'll take your questions.

The first quarter of this year was marked by challenging equity market conditions and increased volatility globally and these conditions persisted in April. An important contributing factor to the current environment has been the US Federal Reserve’s tapering of its bond buying program and related action, which has reduced liquidity expectations in the broader market globally. Changes to liquidity expectations affect the equity market in ways that will be difficult to anticipate.

Earlier this year we saw similar effects on the emerging markets. Towards the end of the first quarter, and again in April, our long/short equity portfolios underperformed. We attribute this result to a widening of the bases as our long positions underperformed, while our short positions generally performed in line with the market. However, there were no company specific events or catalysts that drove this underperformance.

We used the dislocation in the market as an opportunity to adjust the positions within each portfolio and we began to modestly reduce our exposures. We are confident that we are balancing the rest with a potential for returns on our long positions, and our outlook for the opportunity set in event-driven equities generally remains unchanged.

Our performance in our credit strategies remained strong through April, and we continue to find interesting investments, although our overall position has gradually become more cautious. As always, we actively managed our exposures as market conditions evolved. Our stringent and disciplined risk management and our investment processes are unchanged, and we continue to maintain highly diversified portfolios.

We have a 20-year history of consistently protecting capital and generating profits for our fund investors. We view these attributes as key elements of our competitive differentiation, we believe that we are well positioned to create substantial incremental value for our fund investors.

We are pleased with the progress we have made towards our strategic objective of becoming a multi-product, alternative asset manager. We will continue to focus on developing solutions that help our clients meet their investment objectives. This enables us to grow and diversify our business in a way that is beneficial to our fund investors, shareholders and employees. Our capital net inflows and growth in assets under management have been strong year-to-date with solid momentum across all platforms.

The tone of the conversation we are having with investors continues to be very positive. We believe that investors view alternative asset managers as increasingly important to achieving their investment objectives in both their equity and fixed income portfolios. As a result, we think that demand will continue to grow for managers that have global reach, or for a diverse range of products and can create customized solutions for their clients. We view this trend as a substantial growth opportunity for our business and believe that it will result in meaningful new capital allocations to us over time from investors globally.

Now let me turn to our assets under management. As we announced this morning, our assets under management as of May 1 totaled $43.5 billion, increasing $3.3 billion or 8% from $40.2 billion on December 31 of last year. This increase was due to approximately $3.6 billion of net inflows, including $590 million of CLO assets, partially offset by $290 million of performance related depreciation.

Our year-to-date net inflows through May 1st are the highest for this period that we have experienced since going public in 2007, and are reflective of the growing diversification of our platforms. We experienced strong net inflows into our multi-strategy funds, as well as into our dedicated credit and long/short platforms. Additionally, we successfully completed the first two closings of our third real estate fund, raising $950 million through May 1st. Across all our platforms, we are continuing to experience high demand from current and prospective fund investors globally. Pension funds and private banks were the largest contributors of year-to-date net inflows, and we anticipate that the momentum we have at least in other investors both current and prospective, will remain strong.

Now let me turn to our funds' investment performance. Year-to-date through April 31, our Master Fund was down 0.9% net, our Europe Master Fund was down 1.3% net, and our Asia Master Fund was down 9.2% net. We are incrementally more cautious on the investing environment globally as macroeconomic and political uncertainties persist. However, as I mentioned previously our outlook for the opportunities set in event driven equities remains generally unchanged. We are active in our credit related strategies and see a number of new investment opportunities in real estate. Across all our products, we continue to adhere to our research-driven bottom up investment process, and we made measured in our investments with a focus on protecting capital and generating consistent positive absolute returns.

With that, let me now turn the call over to Joel, who will take you through our financial results.

Joel Martin Frank

Thanks, Dan. This morning, I'll discuss our 2014 first quarter results, and provide some perspective on how we’re thinking about expenses for the second quarter year.

For the 2014 first quarter, we reported GAAP net income of $24 million, or $0.14 per basic and diluted Class A share. As always, a discussion of our GAAP results is included in the press release for your reference. Now let us turn to the details behind our 2014 first quarter economic income beginning with revenues. Management fees totaled $155 million, 6% higher than the 2013 fourth quarter. From October 1st to January 1st, our assets under management grew by approximately $2.8 billion, or 7%, to $40.6 billion.

From January 1 to April 1, our assets under management grew another $2.1 billion, or 5%, to approximately $42.7 billion. Our average management fee was approximately 1.51% for the quarter compared to 1.52% for the 2013 fourth-quarter. As a reminder, we anticipate that our average management fee will vary based on the mix of products that drive the growth in our assets under management and therefore will fluctuate over time.

Incentive income was approximately $59 million during the first quarter. This amount was primarily attributable to distribution to cover tax liabilities on incentive income that has been accrued, but not realized by some of our funds, reflecting the strong investment performance in those funds. The remainder was mostly due to crystallization of incentives related to longer term assets.

I like to highlight that our recognition of incentive income during the first quarter is reflective of the expansion and evolution of our business from being a multi-strategy hedge fund manager to a multi-product alternative asset manager.

Now let me turn to our operating expenses. Comp and benefits totaled $29 million during the first quarter. Of this amount, salaries and benefits were $26 million, a 7% increase from the 2013 fourth quarter due to our hiring activities globally. First quarter comp and benefits also included $4 million of bonus expense. Salaries and benefits were 70% of management fees in the first quarter. We expect this ratio to continue to be approximately 16% to 18% of management fees in the second quarter of this year.

Now turning to non-compensation expenses. Non-comp expenses totaled approximately $29 million in the first quarter, a 10% decrease from the 2013 fourth-quarter mainly due to the recovery of expenses we incurred to launch our third real estate fund as well as a net decline in professional services. Now comp expenses totaled 19% of management fees in the first quarter. We expect this ratio to remain in the range of 19% to 21% for the second quarter of this year.

Our 2014 first quarter effective tax rate was 21%. We estimate that this rate will be in the range of 20% to 25% for the second quarter of this year. As always, I want to remind you that these estimates are subject to many variables that won’t be finalized until the fourth quarter of this year and therefore could change meaningfully.

Our 2014 first quarter distributable earnings grew $128 million or $0.25 per adjusted Class A share. As you saw in our press release this morning, our dividend for the 2014 first-quarter is $0.23 per Class A share. As we typically do, we use cash to fund items related to the operation of our business.

In closing, I like to emphasize the repeatability of our returns over time and the value of the results and strength of our performance track record. While our month to month returns may vary, we have a 20 year history of generating consistent positive absolute returns and creating significant profit and value for our fund investors. Our track record and the quality and consistency of our investment process for each of our platforms remains the single most important criteria to current and prospective fund investors and allocating capital to funds.

We think these attributes create sustainable growth and momentum in our assets under management not only this year, but in subsequent years as well. Investors continue to demonstrate a high level of interest in our platforms, and we believe we are well positioned to continue strong asset growth. As our assets under management grow and we generate consistent absolute returns as we have done historically, our management fees and incentive income expands.

As we expand our product platforms, our ability to grow assets increases as does the diversification of our revenues. Because our fixed expenses have been low historically relative to our revenues, our business has been highly profitable with the majority of any revenue growth flowing through to our bottom line. We firmly believe that this combination of factors will drive powerful earnings and dividend growth over time for our shareholders.

With that we will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Dan Fannon with Jefferies. Please proceed.

Daniel Fannon - Jefferies

Hi, good morning gentlemen. I guess just Dan if you could talk about the interaction you are having with your clients today, you know, following some of the more volatile performance and is the frequency of communication picking up, are you getting more questions about, you know, kind of the strategies, just wanted some general thoughts in terms of that communication?

Daniel Saul Och

Sure. Look we are quite open about the fact that over a roughly six-week period we did underperform, particularly in the event-driven equities area. On the other hand, we have got a 20-year record of generating very strong, consistent absolute performance. Our clients know that we are very, very driven to do that. The dialog that I am having with clients really has not changed dramatically. It continues to be about where do we see opportunities, what are the areas of Och-Ziff that they can utilize, you know, we always say that one month and one quarter is not that key, but if you look at the flow of numbers, whether it is that we announced this morning or since the beginning of the year, we think more than ever clients recognize what we provide they understand the multiproduct nature and how that is creating opportunities for them.

Daniel Fannon - Jefferies

And I guess just thinking about the private bank channel, in particular, which has been a fast-growing area for you, you know, it seems that is a bit more fragmented, granted you deal with the gatekeepers, but wondering, you know, how you view the stickiness in those assets, you know, over time versus the traditional pensions or more institutional like clients?

Daniel Saul Och

Well, historically they have been very sticky. Don’t forget for anyone in our position, we look at the total. So we look at the total that we have from a private bank, and what we care about is on a monthly, quarterly and annual basis what are those flows. If on an underlying basis it is like a mutual fund, if on an underlying basis, two clients come out and four clients come in, you know, we focus on the net. But historically they have been quite sticky.

They really understand. That is very important to us. We will not participate with a private bank unless we think that the people doing the work at that bank really understand what we do, really do due diligence, really focus on our transparency reports, and communicate with their FAs. So it is not, you know, look it is relatively new. It is not as old as the institutional market, but we are very confident in that channel.

Daniel Fannon - Jefferies

Great, and then just one more if I could please on the real estate, I guess is there a goal for the ultimate size of that fund and a time period for which you think it might be, you know, fully closed?

Daniel Saul Och

No particular goal. Obviously we are going to raise money and we are limited to what we think our capacity is and what we can invest in, but obviously there is growth in that business and, you know, whether it is -- again getting this fund to be bigger or future opportunities we will continue to look at that and grow that business.

Joel Martin Frank

We look at real estate as a platform, as an investment platform and as a key business, not just as a fund. So, obviously real estate as real estate (inaudible) is in process right now. But number one, the real estate group is very important to a lot of what we are doing on the credit side. There is no doubt that both in the US and Europe, the synergies between our real estate group and our structured credit groups have been very important, and we think that will continue. And we think that there will be opportunities to do other things in those platforms.

Daniel Fannon - Jefferies

Great. Thank you.

Joel Martin Frank

Thank you.

Operator

Your next question comes from the line of Bill Katz with Citi. Please proceed.

William R. Katz - Citigroup Inc.

Okay. Thanks very much for taking the questions. I guess the first one is just to sort of turn a little back on performance, if you look back over the last couple of months I think the returns are a bit more choppy relative to your 20-year track record, which is quite notable, so I guess the question ultimately is as you build out your size and your diversification, is there any risk to that value proposition a little bit, and maybe you are starting to see that or is it really just the volatility employed by some liquidity constraints?

Daniel Saul Och

We don’t think that what occurred has anything to do with our size and quite frankly diversification, it is a good thing. At the end of the day, our longs underperformed primarily in the event-driven long/short area in all three geographic regions. There were some substantial gyrations in the markets. I mean that is not an excuse. That is a statement of what occurred, and we did not do as well during that six week period in that one area as we expect ourselves to do.

So we are not okay with that. However, we are focused on turning that around and moving forward. And as we normally do in our portfolios, we don’t look at where we were yesterday and what might we have done. We look at where are we today and what is the opportunity going forward, and we do very good about what we have and how we are going to perform.

William R. Katz - Citigroup Inc.

Okay, that is helpful. The second question is there has obviously been a lot of focus on some of the investigations that is going on right now, maybe in the Congo they are the two areas of focus for investors, can you just step back and walk us through maybe how we should be thinking about any regulatory concerns, what they might be focusing on and what kind of process you have in place to dissuading their concerns, because obviously the organic growth is as best as it has ever been, so investors seem to be shrugging it off, (inaudible) had a sort of triangulated between those two dynamics?

Joel Martin Frank

Although we appreciate the question, we understand why you are asking. However, obviously you know this is the continuing investigation, and we’re limited in what way can say. However, with that said our investment – we have constant dialogues, as Dan said, with our investors. There are continued dialogs and most of the focus is around what can you do for us, our performance et cetera, and we are as transparent as we can be with them. So, you know, as I think in terms of the investor front, again continuing dialogs, which we will continue to do and, you know, again we are very limited in terms of what we can say in anything else.

William R. Katz - Citigroup Inc.

Okay. Just one last one from me, also thank you for taking my questions, how do you think about now sort of the modeling aspect of performance fees, I guess part of it was other portfolios, and as you expand anyway to sort of think about now and how [locks] play out or from a quarter-to-quarter perspective help us to try and, you know, get our position down in the modeling?

Daniel Saul Och

Well, to the extent we can, you know, we always give you guidance on the longer term assets and when there maybe a maturity date and so on. In other cases, where we have longer term assets, it is a little bit harder to predict. It is based on the end of the investment period and selling off some of that. So it is a little bit harder to predict. But like in any case we are not able to give you more guidance, and we will try to do it will be helpful.

And, you know, in terms of our other businesses, we are always thinking about being more transparent. That is always a dialogue and as we get bigger and as we think through that process we will try to give you more information.

William R. Katz - Citigroup Inc.

Okay. Thank you for taking my questions.

Operator

Your next question comes from the line of Ken Worthington with JP Morgan. Please proceed.

Kenneth B. Worthington - JP Morgan

Hi, good morning. I think you will probably see a theme to all these questions. So, Och-Ziff has a reputation of being able to effectively hedge the downside, I think in the past that you have effectively used cash to help manage risk and I believe that you have pursued some sort of risk overlays to help manage risk, how are you thinking about the use of those in the current market environment. Obviously you just reported cash, you still have a 0% cash position. But again, like in the past you have used it more and then any comment on sort of risk overlays and if they have been less effective and maybe why?

Daniel Saul Och

All those management processes is a combination of a number of different things, and you did just refer to some of them. We do look at overall risk that we see in the world, overall risk that we see in the financial markets, overall level of financial markets’ credit spreads volatility expectations, and that is relevant from the top down in terms of our (inaudible), over our exposures.

We are also very focused from a bottoms up, what are the opportunities in each area, where do we think we can drive performance, where are the relative opportunities. And none of that – none of that has changed as a result of what we saw over the prior six weeks, and it is not going to change going forward. We did say that we are modestly more cautious on the investing environment. That there are some things going on that are a little bit different than where it was 4 to 6 months ago.

As a general matter growth in the first four months of the year globally was a little bit slower than expectations and we think that that is relevant. We did refer to the fact that

with the Fed tapering that is a reduction in expected liquidity to the market, and that is always something to be conscious and careful of. I think we saw emerging markets were the first thing to really, you know, to really be affected by that and start to focus.

But, you know, we are not changing anything about them, methodologies and process. Quite frankly, we think that they are working. Now in other words, we did underperform and many sectors that we are involved in did get – did get hit and did go down and that can happen. The question is when that happens, are they permanent losses of capital or do they give you opportunities to readjust. If you think it is mistakes in what you have done or creating opportunities, you know, and move down to those things.

So sometimes these dislocations – you have to remember, sometimes dislocations are what create the opportunities for us. But we do want to be clear, we did not do as well in that event-driven equities area during that roughly six-week period, and if anything that is, you know, that drives us a little bit harder.

Kenneth B. Worthington - JP Morgan

Great. Sales, they are really good this quarter. In terms of the sales cycle, how long is it these days and maybe how has the sales cycle changed from prior to the credit crisis? Is it taking, you know, eight months of dialogue to kind of close business in existing products, is it taking two months to a year and a half like, you are driving really good sales, you know, how long is it taking to actually close these – this business?

Daniel Saul Och

Well, if you ask how long versus before the crisis, the number one difference is that a lot of our investments before the crisis came from fund to fund, as you know from the allocation. And so that was – for us that was a shorter process because they were investors with us and then hopefully each month and each quarter they would add and if that underlying investor took them one month or six months or two years, it didn’t really make a difference to us. These days as you have seen from the numbers we show, you know, Joel can give you if someone wants them, the allocations tend to be more direct.

And, you know, that is we think overall that has benefits, but it means that our process tends to be – however, we have to remember those are constantly on balance. So, they are investors that take several months, they are investors that take several years. We have investors, people internationally, who we first me before the financial crisis and they have recently done things with us. That maybe because they have changed they way they are looking at hedge funds that may in a lot of cases because they have changed the way they are looking at Och-Ziff and what we do.

So it can be – and it can be all over. I think the key is that more than ever investors understand what we do here, why it is a value to them, why this idea of being a multiproduct solutions provider is very good for them regardless of who we are. It strengthens all of our products and all of our capabilities and the ability of the areas to work together. If you never invest in any of our real estate products we still benefit if you are in the multi-strategy fund.

If you never invest in our European products, you still benefit from the fact that we have it. I mean that is something that is unique to our culture and something that has been very important in our multi-strategy funds for 20 years and it has become very important as a multiproduct alternative manager over the past 5 to 7 years.

Joel Martin Frank

And I think that’s a very important point in relation to a longer due diligence process, give them the ability to really understand everything Dan said from soup to nuts, who we are, how we do it, and what the capabilities that we have are. So I think that process being long is actually a benefit to us.

Kenneth B. Worthington - JP Morgan

Okay, great. And then just lastly, and in terms of the incentive income and this is for Joel, you highlighted the tax distributions, and also the longer term investments, when we think about the tax side of it, I assume that is going to be a first-quarter thing that we will see more often going forward, was that the majority of it, was it a smaller part, I’m just trying to size it so I can think about, you know, 1Qs and 15, 16 and 17 and so on?

Joel Martin Frank

I mean it is a combination of it, but most of it relates to the longer term assets, you know, what happens obviously over a period of time is we have generated a lot of earnings and obviously the distributions relate to the incentive generated from that, but it is more of, you know, related to the diversification of our business, the growth in our business, timing changes. You know, obviously the majority of the incentive is still year-end, however, what this shows you is different types of products, different structures. So it's really more related to the longer term assets, and as I said to Bill earlier as we can and if we can give you more guidance on that we will try to help you model that out.

Kenneth B. Worthington - JP Morgan

Perfect, thanks. The color was very helpful. Thank you very much.

Operator

Your next question comes from the line of Robert Lee with KBW. Please proceed.

Robert Lee – KBW

Thanks. Good morning guys. The first question is really on the capital deployment, achieving capital management. In understanding that the structure is very efficient for distributions and clearly that's what everyone and LPs are focused on but I mean to the extent your share counts growing at about a 5% rate in the last couple of years, you know, each year, and that is – there is some headwind to kind of, you know, growth of the distribution. So how should we be – you know what’s the appetite or possibility of actually deploying, some of the incremental cash generation to taking care some of the share count growth or is that something that you think could be a good use of cash?

Daniel Saul Och

No, it's something that we talk about. We have no plans to do it. You know, we think about at all times how to use cash and we try to think what the most beneficial way is for our shareholders. And of course, obviously that's a consideration but that may not be the most optimal way to benefit our shareholders. So it's a consideration. It's not something that we are going to do anything about at the moment and we will continue our processes of thinking about what is best for our shareholders and how to use that cash.

Robert Lee – KBW

Okay, and maybe this is really I guess another way of asking questions that some other have asked, if we think of the, you know, the credit funds, the real estate funds, you know, some of the longer term assets where you have good fundraising and it looks like and I think good performance is there a way of getting a sense of what's kind of the, for lack of a better word, kind of the incentives that you are – you have generated that clearly haven’t passed to the P&L, you know, maybe it's kind of a – almost a crude incentive concept, you know that some of your peers do have or disclose. I mean if I look at the credit funds with $4.8 billion of assets, which I assume is mostly kind of cost basis or that's the capital basis, what's the kind of, you know, the fair value of those funds right now.

Daniel Saul Och

You know it's obviously something that we don't disclose individually. As I said earlier I will give you guidance as I can for these types of assets. We don't accrue it. Remember our modeled cash flow we are trying to tell you, hey how much cash is this business generating, and what your distributions are going to be. So we will give you guidance as we can. If disclosures change in the future based of our discussions that will give you some help but it will be more on a guidance basis than anything else.

Robert Lee – KBW

Okay. And maybe one last question. The other multi-strat funds where the performance isn’t disclosed, can you give some color or has the performance on those, you know, in aggregate been similar to the others, you know, maybe a little bit below, little negative year-to-date type of thing or are they kind of little bit below, high watermarks or where do those stand?

Daniel Saul Och

The other multi-strat funds performed pretty much in line with the Master Fund.

Robert Lee – KBW

Great, thanks for taking my questions.

Daniel Saul Och

Thank you.

Operator

Your next question comes from the line of Cynthia Mayer with Bank of America, Merrill Lynch. Please proceed.

Cynthia Mayer - Bank of America Merrill Lynch

Hi. Thanks a lot. Maybe just if I can get a little more color on the flows, your new products like real estate, which you are building really nicely, who are the new investors here? Are they primarily existing investors moving over which I think you have mentioned in the past or are you reaching entirely new sets of investors because you have new products? Thanks.

Daniel Saul Och

So we have, you know, there are investors in this real estate funds, who have invested in prior real estate products and prior Och-Ziff products and they are the investors who have never invested in our Ziff product, and obviously one of the things that we do whenever an investor comes into one of our products, we want to make sure over time that we can show them, you know, what the firm is all about, the consistency of what we do in different products and look to develop a deeper multi-product relationship.

So real estate benefits from other Och-Ziff investors seeing what real estate does and other Och-Ziff products will hopefully benefit from real estate, new investors coming to real estate, seeing what Och-Ziff does and obviously what drives that is the client has more ways to benefit from the relationship with Och-Ziff.

Cynthia Mayer - Bank of America Merrill Lynch

And how are you positioning that fund versus other real estate funds out there?

Daniel Saul Och

Our real estate – Och-Ziff real estate clearly is similar in its plan to what we did in the prior real estate funds.

Cynthia Mayer - Bank of America Merrill Lynch

Okay. And then same thing mix of geography, is there any shift in terms of money coming in from clients in Europe or Asia or is it generally the same proportion as before? Is the slow down outside the US affecting that at all?

Daniel Saul Och

No. It's pretty similar. It's pretty much in line with what we told you in the past.

Cynthia Mayer - Bank of America Merrill Lynch

Okay. And then a question on expenses your guidance on non-comp as a percentage of revenues I think went down a bit and I am just wondering is that a function of, you know, the operating leverage in the model or are there some costs in there that are dropping in a sustainable way like I think this quarter you cited professional fees being a bit lower.

Daniel Saul Och

Yeah I also mentioned that we did reimbursed with some of the cost related to our real estate funds. So I think, you know, Cynthia just I think the guidance will direct you in terms of how to model that, otherwise it's going to be really no material changes in the near future.

Cynthia Mayer - Bank of America Merrill Lynch

Okay, great. And lastly I guess it's just circling back to the prior question, have you given an amount recently on terms of the dollar amount of your three-year assets at this point?

Daniel Saul Och

I will give you an idea of the longer-term multi-strat assets. You know that's about a little close to $3.4 billion in terms of the multi-strat assets and then obviously you have real estate and other assets that are a little bit longer. So, you know, that runs, that's approximately $9.5 billion excluding the CLOs.

Cynthia Mayer - Bank of America Merrill Lynch

Okay, great. Thanks a lot.

Operator

Your next question comes from the line of Marc Irizarry with Goldman Sachs. Please proceed.

Unidentified Analyst

Thanks. Today this is (inaudible) for Marc Irizarry. Just a follow-up on the salaries and benefits, you know, you gave some helpful color on what we should expect for 2Q, just anything, you know is that kind of a good run rate to use as a percent of management fees for the foreseeable future, you know, is there any other foreseeable headcount or other expense increase that we should expect this year, that’s a good run rate. Thanks.

Daniel Saul Och

Well, 16% to 18% is a good – it's good guidance for the second quarter. We don't expect material increases to the headcount although we will hire as we grow, as we always do. But, you know, you will get a sense of that if I change guidance as we go forward but right now I think that's the right range.

Unidentified Analyst

Okay. Thank you very much.

Operator

(Operator instructions) Your next question comes from the line of Patrick Davitt with Autonomous. Please proceed.

Patrick Davitt - Autonomous Research

Hi, good morning. I am probably beating a dead horse here, but I will try on the incentive fee again, to the extent that your credit portfolio continues to get larger, is there a meaningful portion of that now that you could consider more recurring or yield or generated from, you know, yield, I guess so to speak?

Daniel Saul Och

Yeah. Certainly not yield related but I think the way you have to look at this Patrick is these are part of our longer term assets, and as I said earlier, you know, until we or if we change our disclosure in order to give more information but until we get there, I am going to try to give you as much guidance as I can in relation to that.

Patrick Davitt - Autonomous Research

Okay. Fair enough. Thank you. And then just as a follow-up on flows, if you adjust for the real estate closings and CLOs it looks like at least the kind of core flow story around the hedge funds has been kind of tracking down pretty significantly from the first quarter at least. I am wondering if you are seeing a ramp up in redemption conversations as a result of the recent volatility or if you can get you know normal kind of volatility that you would always see?

Daniel Saul Och

No. I think that is inaccurate because quite honestly real estate fund is let's say around a billion, CLOs are about $600 million. We brought in $3.6 billion inflows to the first quarter, excuse me, first that's $2 billion in our other multi-strat and other funds. So there is no slow down. We see inflows across all our products and we have, you know, the conversations have been pretty static in terms of opportunities and people are just investing in our products.

Joel Martin Frank

Patrick, the $950 million we mentioned in real estate is in the numbers for the first four months of the year but it's not all in the number that was announced today. I think there might be (inaudible) differential.

Patrick Davitt - Autonomous Research

Okay. Perfect. Thank you.

Operator

That concludes the question-and-answer session for today. I will now turn the call over to Ms. Madon for any closing remarks.

Tina Madon

Thanks, Janita. Thank you, everyone, for joining us today and for your interest in Och-Ziff. If you have any questions, please don't hesitate to contact me at (212) 719-7381. Media inquiries should be directed to Jonathan Gasthalter at (212) 687-8080.

Operator

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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