Sculptor Capital Management: Sculpting A Future Income Stream
Summary
- Growing assets under management with total 1-year return over 140%.
- Distribution yield exceeds 12% so far in 2021.
- Shareholder friendly management team that is making wise decisions on capital allocation.
kristo74/iStock via Getty Images
In my quest for the holy grail of long-term income investing I have been seeking more than just alpha. I look for undervalued or under followed companies that offer a high yield distribution (> 6%) with capital appreciation potential and relative protection to significant downside risk. Earlier this year I came across a company that I believe meets those criteria, Sculptor Capital Management, Inc. (NYSE:SCU).
You can read more about the company history from previous contributors but what compels me to write about the investment opportunity is the change in leadership that has resulted in significant improvement to the total return since the start of 2020. The company has also embraced a shareholder friendly dividend policy, paying out $3.19 in dividends so far this year (through Q2) which equates to about a 12% yield at the current share price.
Company Overview
On April 1, 2019, Och-Ziff Capital Management Group, LLC (“OZM”) reorganized from a publicly traded partnership to a corporation. Effective May 9, 2019, Och-Ziff Capital Management Group, LLC converted from a Delaware LLC to a Delaware Corporation known as Och-Ziff Capital Management Group Inc. On September 12, 2019, Och-Ziff Capital Management Group Inc. changed its name to Sculptor Capital Management, Inc.
(source: Sculptor Investor Relations web page)
The company profile as summarized by TD Ameritrade states:
Sculptor Capital Management Inc. is a global diversified alternative asset management company. The Company offers a range of products across its Multi-Strategy, Credit, and Real Estate businesses. It operates across North America, Europe and Asia. Its Multi-Strategy platform invests in investment ideas across asset classes, regions and investment strategies. Its credit platform comprises both opportunistic credit and Institutional Credit Strategies. Its opportunistic credit focuses on private credit markets, including investments in distressed businesses, restructurings and bankruptcies. Its institutional credit strategies invest in performing credit through leveraged loans, high yield bonds, private financing and investment-grade credit and serves clients through collateralized loan obligations (CLOs), collateralized bond obligations (CBOs), commingled products and customized solutions. Its real estate funds generally make investments in commercial and residential real estate.
Source: (TD Ameritrade company profile and Scultpor.com website)
The company employs a Master Fund concept which aggregates the returns of each of the 3 investment areas of Multi-Strategy, which employs investment teams in various locations around the globe; Credit, which includes some private credit as well as institutional Credit Strategies; and Real Estate, which also includes some private equity investments in addition to more traditional residential and commercial real estate credit.
As of October 1, 2021, the Master Fund includes $36.9B in total assets under management, which reflects a net decrease of approximately $0.4 billion since September 1, 2021. The Company’s estimate of assets under management is inclusive of performance for the month ended September 30, 2021 and capital flows from September 2, 2021 through October 1, 2021, and includes approximately $42.9 million of distributions and other reductions to investors in certain funds.
It appears the AUM has leveled off a bit in recent months, however, the company continues to pay down debt and improve the balance sheet.
Total Return over 140%
The monthly net return for September 1 to September 30 was 0.74% and the YTD net return estimate as of Sept 30 was 7.44%. As of 10/27 from the company investor relations web page, the YTD total return is 67.48%, and 1-year return is at 140.84%.
Net return represents a composite of the average return of the feeder funds that comprise the Sculptor Master Fund. Net return is presented on a total return basis, net of all fees and expenses and includes the reinvestment of all dividends and other income. The performance calculation for the Sculptor Master Fund excludes realized and unrealized gains and losses attributable to currency hedging specific to certain investors investing in Sculptor Master Fund in currencies other than the U.S. dollar.
The net return estimates exclude special investments or other investments for which it is difficult or impossible to determine a reasonable fair value.
Source: (Form 8-K October 4, 2021)
Of that total 36.9B in AUM the Multi-Strategy products include 11.2B as of October 1.
Credit consists of 21.4B also as of Oct 1.
Real Estate makes up 6.5B in opportunistic real estate and 1.4B in real estate credit as of June 30.
Source: (Scultpor.com website)
The Shareholder letter from May 5 of this year includes some details about the company explaining the long-term vision, strategy, and their fundamental approach to investing. The company has new leadership including Jimmy Levin as CEO. The Board Chair is Marcy Engel, the first female chair of a major alternative asset investment firm. There are 20 seasoned Executive Managing Directors, many of whom have worked together for 15 years or more.
Daniel Och, who started the firm in 1994, stepped down in 2019 from his duties as CEO after a settlement that included a fine for bribing foreign government officials. The company was then re-branded to Sculptor Capital Management. Jimmy Levin took over as CEO in June 2020. He originally joined the firm in 2006 and acts as Chairperson of the Portfolio Committee as well as Chairperson of the Partner Management Committee.
The following is paraphrased from the May shareholder letter and is how Jimmy Levin describes the company's vision:
- The fundamental approach is described as opportunistic. They position the team and the capital to keep capital flowing freely to its highest and best use based on current market conditions. At the same time, they strive to maintain the discipline to live within the risk limits of their investment mission.
- Their investment model benefits from the full collaboration among their tenured investment team across the full range of products, multi-strategy, credit, and real estate.
Source: (Sculptor Shareholder letter dated May 5, 2021)
Q2 2021 Earnings
The following highlights are from the Second Quarter 2021 earnings report:
NEW YORK, August 4, 2021 - Sculptor Capital Management, Inc. (NYSE: SCU) today reported GAAP Net Income attributable to Class A Shareholders ("GAAP Net Income") of $21.8 million, or $0.87 per basic and $0.40 per diluted Class A Share, for the second quarter of 2021
▪ Distributable Earnings1 for the second quarter of 2021 were $67.3 million, or $1.12 per Fully Diluted Share
▪ A cash dividend of $0.54 was declared for the second quarter of 2021, payable on August 24, 2021, to Class A Shareholders of record as of August 17, 2021
▪ Sculptor Master Fund was up 2.3% net for the second quarter of 2021 and up 5.7% net year-to-date through July 31, 2021
▪ Sculptor Customized Credit Focused Platform and Sculptor Credit Opportunities Master Fund were each up 4.2% net for the second quarter of 2021 and up 12.0% and 12.2% net, respectively, year-to date through July 31, 2021
▪ AUM was $37.6 billion as of August 1, 2021, up $2.1 billion year-over-year, including a second straight quarter of net inflows into our multi-strategy funds in the second quarter of 2021
▪ Adjusted Net Assets increased by $73.5 million during the quarter to $301.9 million
▪ An additional $50.0 million prepayment was made on the 2020 Term Loan, reducing the outstanding balance to $95.0 million and marking our lowest level of long-term debt since 2007
Source: Sculptor Capital Q2 earnings press release
Dividends
Although the former company known as Och-Ziff Capital was formed as a limited partnership and shareholders received a K-1 at tax time, the new company converted to a corporation in 2019 and instead issues a 1099-DIV form for reporting dividends.
The company more than covered its dividend distribution in the 2nd quarter, even after raising it 80% from the prior dividend of $0.30. In addition, the long-term debt was paid down improving the balance sheet.
Current forward distribution yield as of 10/27 according to SA is at 8.76%. However, based on dividends paid to date which includes $2.35 paid in March, $0.30 in May, and $0.54 in August the current yield for 2021 if no more dividends are distributed sits at about 12%.
With a payout ratio of 52% according to SA the dividend seems to be relatively “safe” and could potentially be increased again depending on second half performance.
Quant ratings
According to the quant ratings for SCU the overall score has changed from Very Bullish 3 months ago to Neutral now. It appears that is mostly due to the change in the Growth grade from a B to D+.
Factor Grades
| Now | 3M ago | 6M ago | |
|---|---|---|---|
| Valuation | A+ | A+ | A+ |
| Growth | D+ | B | B+ |
| Profitability | A- | A- | B |
| Momentum | B+ | A | B+ |
| Revisions | A | D+ | D+ |
Digging into the growth factors a bit more reveals that working capital growth YOY is showing a significant decline, however, that is the only area of growth that is currently showing less than a B grade.
Growth Grade and Underlying Metrics
SCU Growth Grade
D+
Sector Relative Grade | SCU | Sector Median | % Diff. to Sector | |
Revenue Growth (YoY) | A+ | 77.51% | 18.26% | 324.50% |
Revenue Growth (FWD) | C+ | 5.96% | 5.41% | 10.23% |
EBITDA Growth (YoY) | A+ | 590.61% | 24.80% | 2,281.29% |
EBITDA Growth (FWD) | - | - | 12.40% | - |
EBIT Growth (YoY) | A+ | 696.72% | 20.19% | 3,351.29% |
EBIT Growth (FWD) | - | - | 6.49% | - |
EPS Diluted Growth (YoY) | - | NM | 47.84% | NM |
EPS Diluted Growth (FWD) | B- | 9.38% | 6.79% | 38.17% |
EPS FWD Long Term Growth (3-5Y CAGR) | - | - | 12.44% | - |
Levered FCF Growth (YoY) | A | 217.74% | 35.04% | 521.37% |
Free Cash Flow Per Share Growth Rate (FWD) | - | - | 10.16% | - |
Operating Cash Flow Growth (YoY) | A | 112.04% | 9.76% | 1,047.57% |
Operating Cash Flow Growth (FWD) | - | - | 10.10% | - |
ROE Growth (YoY) | - | NM | 35.64% | NM |
ROE Growth (FWD) | - | - | -1.66% | - |
Working Capital Growth (YoY) | D- | -48.86% | 10.62% | NM |
CAPEX Growth (YoY) | A+ | 168.21% | -9.18% | NM |
Dividend Per Share Growth (FY1) | A- | 11.03% | 4.80% | 130.03% |
1 Year Dividend Growth Rate (TTM) | A+ | 469.64% | 3.39% | 13,754.59% |
It is hard for me to say without digging deeper into the financials what the reason is for that decline and whether this is a trend that is likely to continue. I will be interested to hear if that issue is addressed when they next report Q3 earnings on November 4.
Ownership
Ownership Breakdown | % shares owned |
Hedge funds | 6.1 |
Individual Insiders | 10.9 |
VC/PE Firms | 11.9 |
General Public | 30 |
Institutions | 41.1 |
Source: Simply Wall St
There is a substantial number of shares being held by hedge funds, private equity, and venture capital firms (approximately 18%) which may impact price volatility to some degree. Those types of investors are often looking for short term price increases or undervalued companies that may get sold off in the event of a market correction, or if their price target is exceeded, or simply because they want to deploy those funds elsewhere.
Conclusion
My assessment of SCU is that the company has gone to great lengths to reinvent the corporate culture to improve leadership integrity, financial risk management, and increase net inflows. The recent performance in 2020 and so far in 2021 have been demonstrating positive results. As more investors take a closer look at the company’s balance sheet, growth prospects, and investment risk management I am bullish on the future upside.
The company has been paying a relatively high dividend distribution (12%+) in 2021 and with a low payout ratio there is an opportunity for an additional increase in the next quarterly dividend, or possibly a special year end dividend to be paid.
On the flip side there is potential for downside risk if the overall economy shifts, or a market correction causes a selloff by hedge funds or PE/VC firms that wish to deploy their investment capital into other asset classes.
Furthermore, growth in assets under management appears to be slowing somewhat in the second half of 2021, but the company is also paying down debt and improving the balance sheet. I expect to learn more about the prospects for 2022 and beyond when they discuss Q3 earnings on the November 4 call.
I rate SCU a Hold at the current price of $26.45 as of 10/29/21 going into next week's Q3 earnings report.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of SCU either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I am in independent investor and not a financial advisor. I am interested in sharing ideas and looking for feedback on my investment decisions. This is not a recommendation to buy or sell but rather my personal opinion. Do your own due diligence before making any trading decision.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (77)
NEW YORK, February 16, 2022 - Sculptor Capital Management, Inc. (NYSE: SCU) today reported GAAP Net Loss Attributable to Class A Shareholders of $5.8 million, or $0.23 per basic and $0.75 per diluted Class A Share, for the fourth quarter of 2021, and GAAP Net Loss of $8.6 million, or $0.34 per basic and $0.56 per diluted Class A Share for the full year 2021.
Full Year 2021 and Fourth Quarter 2021 Highlights
▪ Distributable Earnings1,2 were $82.8 million, or $1.38 per Fully Diluted Share for the full year 2021;
there was a loss of $56.3 million, or $0.94 per Fully Diluted Share for the fourth quarter of 2021
▪ No cash dividend was declared for the fourth quarter of 2021 to Class A Shareholders
▪ Sculptor Master Fund was up 5.0% net for full year 2021 and down 2.3% net for the fourth quarter of 2021
▪ Sculptor Credit Opportunities Master Fund and Customized Credit Focused Platform were up 17.0% and 17.2% net, respectively, for the full year 2021, and up 2.3% and 2.6% net, respectively, for the fourth quarter of 2021
▪ Assets under management (“AUM”) were $38.1 billion as of December 31, 2021, up $1.3 billion 3 year-over-year, which includes longer-term AUM of $25.8 billion, up $1.1 billion year-over-year
▪ Gross inflows were $1.2 billion into our multi-strategy funds for 2021, the highest annual gross inflows since 2014 (as a percent of beginning AUM)
▪ Adjusted net assets1,4 were $381.4 million as of December 31, 2021
January 2022 Update
▪ Sculptor Master Fund was down 2.6% net month-to-date through January 31, 2022
▪ Sculptor Credit Opportunities Master Fund and Customized Credit Focused Platform were down
0.3% and 0.6% net, respectively, month-to date through January 31, 2022
▪ As of February 1, 2022, AUM was $37.9 billion
▪ Gross inflows were $452 million into our multi-strategy funds year to date through February 1.
2/4/22: Citigroup Adjusts Price Target to $33.5 From $37.5, Keeps Buy RatingOthers:
Ford Equity Research = Neutral
ISS-EVA = Outperform
McLean Capital Management = Neutral
Zacks Investment Research = Neutral
Refinitiv/Verus = NeutralI/B/E/S Estimates from Refinitiv = Buy with...
Annual EPS Consensus Actual (Expectations)
FY'19...FY'20...(FY'21...FY'22...FY'23)
$3.11....$4.98...($3.25....$3.54...$4.87)
They report earnings next week on the 9th. I am holding for now but will be watching the earnings report closely.Sculptor Director Resigns, Alleges Governance Failures at Hedge Fund -- WSJMr. Rutman alleged the board didn't do adequate work to determine whether Mr. Levin's pay was merited or whether it would "reward mediocrity." He also said Mr. Levin's direct report, Wayne Cohen, also a board member, was allowed to vote on the compensation package over Mr. Rutman's objections, reaching the five votes needed to approve the agreement.
the estimated unaudited amount of assets under management was approximately $38.2 billion, which reflects a net increase of
approximately $0.8 billion since December 1, 2021."shareholders.sculptor.com/...
weakness that could lead to declining earnings." I'm holding, but it ain't easy.
NEW YORK, November 3, 2021 - Sculptor Capital Management, Inc. (NYSE: SCU) today reported a
GAAP Net Loss Attributable to Class A Shareholders of $4.3 million, or $0.17 per basic and diluted Class
A Share, for the third quarter of 2021.
Third Quarter 2021 Highlights
▪ Distributable Earnings1,2 for the third quarter of 2021 were $35.3 million, or $0.58 per Fully Diluted
Share
▪ A cash dividend of $0.28 per Class A Share was declared for the third quarter of 2021, payable on
November 22, 2021, to Class A Shareholders of record as of November 15, 2021
▪ Sculptor Master Fund was up 1.4% net for the third quarter of 2021 and up 7.4% net year-to-date
through September 30, 2021
▪ Sculptor Credit Opportunities Master Fund and Sculptor Customized Credit Focused Platform
were both up 2.4% net, for the third quarter of 2021 and up 14.4% and 14.1% net, respectively,
year-to-date through September 30, 2021
▪ Assets under management were $37.5 billion as of September 30, 2021, up $1.5 billion year-overyear which includes longer-term assets under management of $24.9 billion, up $430.2 million
year-over-year
▪ Adjusted net assets1,3 grew by $90.7 million during the quarter to $392.6 million
October 2021 Update
▪ Sculptor Master Fund was up 1.8% net month-to-date in October, bringing year-to-date
performance to up 9.3% net through October 31, 2021
▪ Sculptor Credit Opportunities Master Fund and Sculptor Customized Credit Focused Platform
were up 0.5% and 0.8% net, respectively, month-to date in October, bringing year-to-date
performance for both to up 15.0% net through October 31, 2021
▪ As of November 1, 2021, assets under management were $37.2 billion
So why is the newb (noob) saying it beat earnings estimates ?
Foresight in this case
That is why I loaded it
Just didn't sell everything like a prudent human