Westwood Holdings Group, Inc. 2023 Form 10-K Summary
Business context and reporting period
Westwood is an investment management and wealth management holding company operating through Westwood Management, Westwood Trust, Salient Advisors and Broadmark Asset Management. Revenue is primarily derived from fees based on assets under management (AUM) and assets under advisement (AUA). The filing covers the fiscal year ended December 31, 2023, with comparisons to 2022 and 2021.
- AUM was $15.5 billion at year-end, up 5% from $14.8 billion; AUA was $1.1 billion.
- Quarterly average AUM increased 15% to $15.0 billion, primarily because of approximately $2.0 billion of market appreciation.
- Net client outflows were $1.3 billion, partially offsetting market appreciation.
- Westwood acquired an additional 32% of Broadmark in January 2023 for approximately $1.2 million net of cash acquired, increasing ownership to approximately 80% and resulting in consolidation.
Financial performance and position
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total revenue | $89.8 million | $68.7 million | Up 31% |
| Net operating income (loss) | $6.0 million | $(4.9) million | Improved by $10.9 million |
| Income (loss) before taxes | $13.4 million | $(5.2) million | Improved by $18.6 million |
| Net income (loss) | $10.6 million | $(4.6) million | Returned to profitability |
| Net income attributable to Westwood | $9.5 million | $(4.6) million | Improved by $14.1 million |
| Diluted EPS | $1.17 | $(0.59) | Improved by $1.76 |
| Operating margin | 6.7% | (7.1%) | Improved |
| Net margin | 11.8% | (6.7%) | Improved |
| Economic Earnings | $18.3 million | $2.7 million | Up 589% |
| Economic EPS | $2.26 | $0.45 | Up 402% |
Asset-based advisory fees increased 44% to $67.4 million, reflecting higher average AUM and the Salient acquisition. Performance-based advisory fees increased to $1.3 million from $1.0 million. Trust fees declined 7% to $20.2 million because of lower average trust AUM. Employee compensation and benefits increased 32% to $52.9 million, while information technology, sales and marketing, mutual fund and general and administrative expenses also increased, largely due to acquired operations and expanded infrastructure.
- Cash and cash equivalents were $20.4 million, compared with $23.9 million at December 31, 2022.
- Cash and short-term investments totaled $53.1 million, compared with $39.2 million in 2022.
- The company had no debt at year-end and working capital of $53.6 million.
- Total assets were $155.2 million and total equity was $122.4 million.
- Operating cash flow was $(1.2) million, compared with $51.5 million in 2022, primarily because 2023 included net purchases of trading investments while 2022 included net sales used to fund the Salient acquisition.
- Investing cash flow was $4.1 million, including $5.0 million of life insurance proceeds, partially offset by the Broadmark acquisition.
- Financing cash flow was $(6.4) million, including $5.5 million of cash dividends.
Material changes versus the prior comparable period
- The 2022 Salient acquisition was included for only part of 2022 but contributed to a full year of revenue and expenses in 2023.
- Broadmark became a consolidated subsidiary in 2023 and contributed approximately $4.4 million of revenue and $4.1 million of net income.
- Westwood recognized a $2.8 million gain from remeasurement of Salient contingent consideration, reducing the liability to $10.1 million at year-end.
- Other income included $5.0 million of life insurance proceeds, a material nonrecurring item.
- Net client flows deteriorated to $1.3 billion of outflows in 2023 from $0.9 billion of outflows in 2022, with outflows concentrated in Income Opportunity, MLP & Energy Infrastructure, LargeCap Value and SmallCap Value strategies.
- Trust fees declined, while Advisory segment revenue increased substantially following the Salient and Broadmark transactions.
- The company paid a quarterly dividend of $0.15 per share, or $0.60 for the year. The filing notes that certain distributions may constitute a return of capital.
Guidance, outlook, commentary and risks
The filing does not provide quantitative earnings or revenue guidance. Management expects to pursue organic growth, expanded intermediary distribution, digital capabilities, wealth management expansion, new investment strategies and potential strategic acquisitions. A Managed Investment Solutions team joined in late 2023 to support customized institutional and wealth investor solutions.
- Future results are highly sensitive to market values and composition of AUM and AUA; management estimates that a hypothetical 10% decline in average AUM and AUA would have reduced 2023 revenue by approximately $9 million.
- Competitive fee pressure, increased use of passive products, investment underperformance and client redemptions could reduce revenue and margins.
- The ten largest clients represented approximately 21% of 2023 fee revenue, creating client concentration risk.
- Advisory, trust and broker-dealer activities are extensively regulated. Regulatory changes, examinations, litigation and compliance failures could materially affect results.
- Cybersecurity, technology, third-party vendor and operational failures could result in service interruptions, liability, reputational damage and regulatory sanctions.
- The company is a holding company dependent on dividends and other transfers from subsidiaries. Westwood Trust is subject to regulatory capital and dividend restrictions.
- Salient contingent consideration is a Level 3 liability valued using Monte Carlo and discounted cash flow models. Changes in revenue growth, volatility or discount rates could materially change its value.
- Purchase commitments totaled $14.6 million, including $6.5 million due within one year. Lease liabilities totaled $4.6 million.
- Westwood Trust had approximately $11.1 million in excess of its $4.0 million minimum restricted capital requirement. SCLP had $558,000 of net capital, $526,000 above its regulatory minimum.
- Management concluded that disclosure controls and internal control over financial reporting were effective; however, Broadmark was excluded from the assessment because it was acquired during 2023.
Most important facts for an investor to verify
- Whether AUM growth can continue despite persistent net client outflows and concentrated outflows in key strategies.
- The sustainability of 2023 profitability excluding the $5.0 million insurance proceeds and $2.8 million contingent-consideration gain.
- The recurring earnings contribution, integration progress and retention of clients and employees at Salient and Broadmark.
- The valuation, payment timing and maximum exposure associated with the $10.1 million Salient contingent consideration liability.
- The company’s ability to maintain the $0.15-per-share quarterly dividend while funding operations, investments and potential acquisitions.
- Exposure to passive-management competition, fee compression, market declines and further client redemptions.
- The adequacy of cybersecurity, vendor oversight, regulatory compliance and controls, particularly because Broadmark was excluded from the year-end control assessment.