Silvercrest Asset Management Group Inc. — Q3 2018 Form 10-Q
Business and period: Silvercrest provides investment management and family-office services, primarily to high-net-worth individuals, families and institutional investors. This unaudited report covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Dollar amounts below are in millions unless stated otherwise.
Financial and operating metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $24.9 | $22.8 | $73.8 | $66.9 |
| Operating income before other income/expense | $5.2 | $5.3 | $15.9 | $15.2 |
| Net income | $3.9 | $3.7 | $12.1 | $10.6 |
| Net income attributable to Silvercrest | $2.2 | $1.9 | $6.7 | $5.4 |
| GAAP diluted EPS | $0.26 | $0.23 | $0.81 | $0.67 |
| Net income margin | 15.6% | 16.3% | 16.4% | 15.9% |
| Adjusted EBITDA | $7.0 | $7.0 | $21.1 | $20.3 |
| Adjusted EBITDA margin | 28.3% | 30.7% | 28.5% | 30.3% |
Management and advisory fees, the main revenue source, rose 9.5% in Q3 and 10.6% year to date. Family-office revenue increased 1.9% in Q3; year-to-date revenue was $3.2 million versus $3.0 million. No Q3 performance fees were recorded; year-to-date performance fees were also nil, compared with $10,000 in 2017.
Assets under management (AUM) were $21.7 billion at September 30, up 5.3% year over year and 1.9% from year-end 2017, but down 0.5% from June 30. For Q3, $2.0 billion of gross inflows and $3.0 billion of gross outflows were partly offset by $0.9 billion of market appreciation. Year to date, $6.5 billion of inflows and $7.3 billion of outflows were offset by $1.2 billion of appreciation. Discretionary AUM was 76% of total AUM; non-discretionary AUM was 24%.
Material changes and cash, debt and liquidity
- Revenue growth did not translate into stronger quarterly operating income: expenses increased 12.8% in Q3, faster than revenue growth of 9.1%. Compensation and benefits rose 10.7%, primarily from higher bonus accruals; general and administrative expense rose 19.8%, mainly due to occupancy and recruiting costs.
- For the first nine months, expenses increased 12.1% against revenue growth of 10.4%. Management cited higher bonuses, New York office occupancy costs, recruiting, portfolio/system expenses and accrued soft-dollar research costs.
- Cash and cash equivalents were $57.7 million at September 30, versus $53.8 million at December 31, 2017. Total assets were $120.7 million and total liabilities $42.9 million.
- Operating cash flow was $14.7 million for the nine months, compared with $13.9 million in 2017. Investing used $0.6 million and financing used $10.2 million, including $6.5 million of partner distributions and $3.5 million of Class A dividends. Cash increased $3.9 million.
- No term-loan or revolving-credit borrowings were outstanding at September 30; the $0.7 million of acquisition-related notes payable at year-end had been repaid. The company reported compliance with credit-facility covenants. The revolving facility was scheduled to mature December 21, 2018; the delayed-draw term-loan maturity was extended to June 24, 2025.
- The quarterly Class A dividend increased from $0.12 to $0.14 per share during 2018; nine-month dividends totaled $3.5 million, or $0.42 per share. Partner distributions totaled $6.5 million year to date.
Outlook, risks and unusual items
- No numeric revenue or earnings guidance was provided. Management said operating cash flow was expected to meet cash needs and commitments for the next 12 months.
- Management identified market performance and AUM as key sensitivities: a 10% change in average AUM was estimated to change annualized revenue by approximately $9.9 million at a 0.46% weighted average fee rate. AUM declines can reduce fee revenue and may prompt further client withdrawals.
- Other disclosed risks include client retention and concentration, net flows, investment performance, fee pressure, competition, attracting and retaining investment professionals, regulatory and litigation costs, cybersecurity and operational safeguards, and execution of growth plans.
- Operating leases represented $59.8 million of future minimum net rentals through 2028. The company expected adoption of the new lease standard to increase reported assets and liabilities.
- The tax receivable agreement (TRA) requires payment to eligible partners of 85% of realized tax savings. The recorded TRA liability was estimated at $9.4 million; future amounts and timing depend on factors including unit exchanges, taxable income and tax rates. The filing warns that certain transactions or tax challenges could cause payments to exceed actual cash savings.
- Silvercrest cited lower corporate tax rates under the 2017 Tax Cuts and Jobs Act as the main reason its reported effective tax rate fell: 25.2% versus 30.2% for Q3 and 24.5% versus 30.1% year to date.
- Adjusted EBITDA, adjusted net income and adjusted EPS are non-GAAP measures. Q3 adjusted EPS was $0.31 basic and diluted; year-to-date adjusted EPS was $0.93 basic and $0.92 diluted. These measures include adjustments and should be considered alongside, not instead of, GAAP results.
Important facts for investors to verify
- Whether the revolving credit facility was renewed, replaced or otherwise addressed before its December 21, 2018 maturity.
- Subsequent AUM flows and investment performance, especially whether outflows persist and how markets affect fee-generating assets.
- Whether expense growth, particularly compensation, occupancy and systems costs, remains above revenue growth and pressures margins.
- TRA payment estimates and the assumptions supporting future tax savings; also review the company’s dividend and partner-distribution capacity.
- The filing reports average AUM of $21.5 billion in its key-performance-indicator table for the nine months, while another MD&A passage states approximately $21.6 billion; confirm the intended figure.