Westwood Holdings Group, Inc. (WHG) Q4 2022 Earnings Call Transcript

Westwood Holdings Group, Inc. (NYSE:WHG) Q4 2022 Earnings Conference Call February 15, 2023 4:30 PM ET

Company Participants

Brian Casey – Chief Executive Officer

Terry Forbes – Chief Financial Officer

Conference Call Participants

Operator

Good day and welcome to the Fourth Quarter 2022 Westwood Holdings Group Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.

I would now like to hand the conference over to your speaker Ms. Julie Gerron, General Counsel. Please go ahead.

Brian Casey

Good afternoon and thanks for listening to our quarterly earnings call. Before I jump into the details of the fourth quarter and the full year 2022, after celebrating 20 years as a public company last year, this year we’re celebrating yet another important milestone, our 40th anniversary since we began back in 1983. Westwood was founded by Susan Byrne in New York, with two colleagues who had worked together at Bankers Trust in the 1970s. The name Westwood is from Westwood, California, which is the home of the UCLA Bruins and the legendary coach, John Wooden. Susan grew up going to those games and always admired coach’s sense of fairness, integrity and teamwork. We have embraced coach Wooden’s Pyramid of Success and strive to live the principles he espoused to his players in their pursuit of 10 NCAA basketball championships.

Over the past four decades, we have enjoyed market ups and weathered market downs by sticking firmly to our investment discipline and running our company with the same standards that we look for in companies where we invest our own client funds. With the experience gained over market cycles, our teams have embraced change, navigated through business and market challenges and they persevered, and I couldn’t be proud of our team and my colleagues I’ve had the pleasure to work with over the past 30 years of our 40-year history. I would also like to congratulate two of my long-term colleagues, Jackie Finley and Kim Calhoun, who have retired from Westwood after more than 25 years of terrific service to our clients, serving in many roles over their tenure. Today, we are rightfully enshrining both of these talented women into the Westwood Hall of Fame, where they will join the best of the best in Westwood’s history. Thank you both for your commitment to Westwood and best of luck to you in your next chapter.

Today’s Westwood draws so much strength from years of investing in people and products, new technology and M&A that enhance our ability to serve clients across multiple distribution channels and solidify our competitive position going forward. One of our most significant investments is the acquisition of Salient Partners’ asset management business, which we completed last November. We are all very enthusiastic about the opportunity ahead with our combined firm’s future growth potential, and I’ll elaborate further towards the end of this call. As for investment performance, many of Westwood’s strategies closed out the year with strong fourth quarter results, including some notable highlights. Several of our U.S. Value strategies outperformed their benchmarks and posted top quartile peer rankings in their Morningstar universes. Select Equity strategies, managed by our Wealth team, outperformed their benchmarks. All of our multi-asset strategies outperformed with several posting top quartile peer rankings.

This past year witnessed the rare feat of bear markets rolling both stocks and bonds, meaning that blended portfolios were hit both ways rather than saved by diversification. Fortunately, the fourth quarter delivered positive results to partially offset a tough 2022 for both equity and fixed income markets. The S&P 500 was positive, while the NASDAQ’s continued dissent created a tempting environment for stock pickers like us. Fixed income returns were helped by tightening credit spreads, moderating inflation and a decline in future interest rate expectations. Against this backdrop, I am pleased to report that all our strategies maintained solid performance for the quarter. Within the multi-asset team, our largest strategy, income opportunity, along with our newer total return, high income and credit opportunity strategies finished ahead of their benchmarks for the quarter and the year. The multi-asset team employs a consistent investment approach that has yielded positive results for clients over multiple periods.

As of December 31, our primary multi-asset strategies had earned 4, 5 stars, and the Westwood Income Opportunity Fund, WHGIX, landed in the 11th percentile for the quarter in Morningstar’s 30% to 50% equity universe. Its longer-term, 3, 5, 7 and 10-year performance, places this strategy firmly in the top quartile. Last year as a whole, our Total Return Mutual Fund, WLVIX, finished in the top third. And for the last three years, Total Return has ranked in the top 5% in Morningstar and top 2% in the institutional investment database, truly great numbers. Our High Income Fund, WHGHX, finished in the top decile for the quarter among Morningstar’s high-yield bond peers and shown in the top 2% for the trailing three years.

Our Alternative Income Mutual Fund, WMNIX, which has a large allocation of convertible securities, often paired with short equity positions, posted positive returns for the quarter amid a positive equity market. It finished the quarter in the top quartile of Morningstar peers in the relative value arbitrage category and posted 19th percentile for the year. This quarter, Multi-Asset team’s newest strategies, Systematic LargeCap and SmallCap Growth, underperformed their benchmarks to Russell 1000 and Russell 2000 Growth Indexes. Both outperformed for the year, however, and our mutual fund, the Westwood SmallCap Growth Fund, WSCIX, ranked in the top third out of 622 Morningstar SmallCap Growth, growth peers.

We’re pleased to report for the first time on the Salient Energy and real estate strategies and the hedged equity strategies in Broadmark. The Westwood Salient MLP SMA, Global Real Estate and real estate income strategies all beat their respective benchmarks for the quarter and full year of 2022.

The Global Real Estate Mutual Fund, KIRXY, ranked in the 18th percentile among global real estate peers at Morningstar and achieved fifth percentile for the year. Our two tactical equity strategies, Tactical Growth and Tactical Plus, sub-advised by our majority-owned subsidiary, Broadmark Asset Management, also performed well and delivered positive performance for the quarter.

Within our U.S. value team, nearly all our strategies outperformed this quarter. Equity markets shifted momentum from bearish to bullish and favored companies with lower valuations and exposure to selected cyclical sectors. Many large technology and higher-quality companies underperformed and so did our large-cap strategy, which felt the drag of holdings in these areas. However, trailing time periods for large cap value remain ahead of the Russell 1000 Value Index.

Our U.S. value strategy is to maintain a high-quality bias in their portfolios. With similar exposures to our large-cap strategy, MidCap has trailed for the quarter, but strongly outperformed the Russell MidCap Value Index in 2022. Our SMidCap, SmallCap and AllCap strategies beat their benchmarks this quarter and for the year.

Our SMidCap Mutual Fund, Westwood Quality SMidCap Fund, WHGMX, ranked in the 14th percentile in the Morningstar’s Small Blend category. And our SmallCap mutual fund, Westwood Quality SmallCap, WHGSX, ranked in the third percentile in the same category for the quarter. Growth strategies also posted strong 2022 Morningstar rankings with 10th and 17th percentile rankings, respectively.

Our AllCap Value mutual fund, Westwood Quality AllCap Fund, WQAIX, finished in the 16th percentile for the quarter among Morningstar’s Large Value universe, which holds more than 1,200 funds and was in the top third for the year. In eVestment’s institutional all-cap value equity universe, Quality AllCap ranked in the tenth percentile for the quarter and finished in the top quartile for the year. In addition to overall strong fourth quarter performance, all our U.S. value strategies with three- and five-year track records are outperforming over those trailing time periods as well.

Our wealth management strategies delivered mixed performance for the quarter as High Alpha underperformed, while Dividend Select and Select Equity outperformed the Russell 1000 Value and Russell 3000 indices, respectively. With a dividend yield that’s 40% higher than the S&P 500 and a strong three-year track record, Dividend Select remains an attractive alternative for high net worth clients seeking income and long-term capital appreciation. These two strategies, Select Equity and Dividend Select, ranked in the 15th and 26th percentile for the quarter in their respective eVestment categories. AllCap Core equity and Dividend Focus, both made it into the top quartile for the year in their respective categories as well.

Shifting now to distribution. Market forces and selected rebalances, primarily in large cap, were the main drivers of institutional flows in fourth quarter and 2022. This quarter’s institutional inflows of $187 million were offset by outflows of $329 million, netting the outflows of $142 million. With few terminations and outperforming in terms of client and AUM retention, we’re poised to recapture client flows in a positive rebalance environment.

At the institutional strategy level, SMidCap enjoyed positive flows this quarter, driven primarily by the funding of a new outsourced CIO client account. While SmallCap client rebalances pushed quarterly flows negative, two new consultant-driven client wins funded in the quarter, and our large-cap value strategy also had a new client funding.

Overall, with few search opportunities in 2022, our team progressed with an improved sales win ratio over 2021. They will continue to focus on maintaining client AUM and pursuing new business activity with key consultants wherever and whenever U.S. value strategies are approved for new searches.

Looking forward, we’re driving toward positive institutional flows based on continued strong investment performance, high client retention and improved sales in a more stable market environment.

In the intermediary channel, we firmly believe that the Salient transaction will prove to be extremely meaningful to our intermediary distribution efforts, with a new, broader product lineup and enhanced platform availability. We envision significant synergies and opportunities emerging as we meld the two legacy distribution groups together. We will provide updates on our progress in future earnings calls.

Turning to Wealth Management, our team had a strong fourth quarter in terms of new inflows. For the quarter, the team had inflows of $109 million, which were offset by outflows of $257 million. Gross sales of $456 million for the full year represented an 11% increase over 2021, while gross outflows declined 19%. This past year, our team added several new client relationships, including two with assets exceeding $30 million. We believe we’re uniquely positioned to gain share in our industry as people continue to flee the large banks in favor of more nimble organizations with a range of client-oriented customized services.

As we emerge from a difficult market environment, our Wealth Group is energized for what 2023 holds in store. We have recruited some great talent and have a strong team in place to gain market share. We continue to work aggressively as we invest in statewide marketing activities and increase our presence as an external facing organization. Overall for the fourth quarter, client flows generated by institutional, intermediary and wealth teams, including the addition of Salient assets amounted to a positive $3.1 billion with outflows of $816 million. For the year, total flows including the addition of Salient assets aggregated $4.2 billion, partially offset by $2.4 billion in outflows.

Although markets were notoriously difficult to navigate last year, Westwood remained focused on executing our plan, which included the strategic acquisition of Salient Partners’ asset management business. This transaction clearly strengthens our platform with the addition of highly complementary investment capabilities across energy infrastructure, real estate, tactical equity, and private investments.

It’s not just access to more desirable investment strategies. This acquisition also significantly expands our distribution capabilities with little channel or client overlap. In addition, we are adding a broad presence in the wirehouse channel to Westwood’s existing strong presence in the independent broker dealer RIA and institutional channels. Our sales teams met last week and identified several large prospects to add to the pipeline. Many of those opportunities will take a few meetings for closure, but there’s some real positive momentum building.

Our expanded distribution team will leverage increased scale and broader product availability along with technical and marketing support to enhance our suite of offerings to a wide range of institutional, intermediary and wealth management clients. Integration efforts, which we’re carefully planned throughout 2022 are continuing across investments, distribution, operations, and enterprise support functions. The integration has touched most areas of our expanded company and is proceeding on schedule thanks to the tremendous efforts of our many talented and dedicated professionals.

Deal-related costs exceeded $7 million of which approximately $5.5 million in one-time cost impacted the fourth quarter. We also spent $1.6 million in the first quarter of 2023 to rationalize the Broadmark shareholder base and increase Westwood’s ownership in Broadmark to nearly 80%. The Salient transaction is expected to result in significant accretion to our economic earnings per share by as much as a 100% this year.

I believe this will prove to be one of the most impactful transactions in Westwood’s history. The benefits to stakeholders are numerous, including immediate accretion to economic earnings, added breadth to our range of investment strategies, a complementary distribution footprint with almost no overlap with Westwood’s existing distribution presence and a strong cultural and geographical fit.

While much work remains to integrate our teams into the new Westwood, we eagerly anticipate the many benefits of this transaction and the opportunities that lie ahead of this all. With January’s market bounce and a potential performance fee to be earned later this month, we can foresee revenues exceeding $95 million this year, provided we don’t have another market downdraft like we saw in 2022.

Also encouraging is that the Salient product set carries higher fee rates, which will improve our overall Phoenix. [Ph] Salient AUA or assets under advisement are much bigger than we’ve historically seen at Westwood. So we have highlighted that for clarity.

To sum up, our teams have spent a lot of time integrating the Salient acquisition and we’re all meshing well as we get to know each other better. We were pleased with our investment team’s performance to close out 2022 and our wealth business is well positioned for growth in Texas. We like the business opportunities presented by our current strategies and can’t wait to see what lies in store for us over the next 40 years.

I’ll now turn it over to Terry Forbes, our CFO.

Terry Forbes

Thanks, Brian, and good afternoon, everyone. Today, we reported total revenues of $20.5 million for the fourth quarter of 2022 compared to $19.4 million in the prior year’s fourth quarter and $15.4 million in the third quarter of 2022. The increase from the prior year was principally due to higher average assets under management. The increase from the prior quarter was a result of higher average assets under management and higher performance fees.

Fourth quarter net loss of $3.1 million compared to the third quarter’s net loss of $1.2 million due to higher expenses, primarily related to the acquisition of $5.3 million in unrealized depreciation on private investments, partially offset by higher revenues. Economic earnings or loss in non-GAAP metric with a loss of $0.7 million or $0.09 per share compared to the third quarter’s economic earnings of $0.8 million or $0.10 per share.

Fourth quarter net loss of $3.1 million or $0.40 per share compared to the prior year’s fourth quarter net income of $2.8 million or $0.36 per share on higher expenses, primarily related to the acquisition of $5.3 million and unrealized depreciation on private investments partially offset by higher revenues.

Economic earnings or loss in non-GAAP metric was a loss of $0.7 million for the current quarter or $0.09 per share compared to earnings of $4.7 million or $0.59 per share in the fourth quarter of 2021.

For fiscal 2022, total revenues of $68.7 million compared to $73.1 million in 2021. The decrease was attributable to a decrease in trust fees, primarily due to lower average assets under management and lower performance fees.

2022 net loss of $4.6 million compared to 2021 net income of $9.8 million on lower revenues, higher expenses primarily related to the acquisition of $7.1 million and higher realized gains on private investments in 2021. Diluted EPS was a loss of $0.59 per share compared with earnings of $1.23 per share for 2021. Economic EPS of $0.45 per share compared with $2.20 per share in 2021.

Firmwide assets under management and advisement totaled $16.1 billion at quarter end that consisted of assets under management of $14.8 billion and assets under advisement of $1.3 billion. Assets under management consisted of institutional assets of $6.8 billion or 46% of the total, private wealth assets of $3.7 billion or 25% of the total, and mutual fund assets of $4.3 billion or 29% of the total.

Over the year, we experienced net inflows of $1.8 billion and market depreciation of $1.5 billion. Net inflows were principally due to $2.7 billion of AUM from the acquisition of Salient. Assets under advisement rose from $0.3 billion in the prior quarter, principally due to $0.9 billion of AUA acquired in the Salient transaction. Our financial position continues to be very solid, with cash and short-term investments at quarter end totaling $39.2 million and a debt-free balance sheet.

I’m happy to announce that our Board of Directors approved a quarterly cash dividend of $0.15 per share, payable on April 3, 2023, to stockholders of record on March 1, 2023. This represents an annualized dividend yield of 5.1% as of the closing price on February 14th.

That brings our prepared comments to a close. We encourage you to review our investor presentation we have posted on our website, reflecting fourth quarter and fiscal 2022 highlights, as well as a discussion of our business, product development and longer-term trends in revenues, earnings and dividends.

Thank you for your interest in our company, and we’ll open the line to questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Brian Casey

Operator, are there no questions?

Operator

I’m showing no questions at this time. I’ll turn the call back over to management for any further remarks.

Brian Casey

Okay. Somehow the conference call team here left out our preamble that Julie Gerron normally reads. So I feel as I need to read this. So thanks for listening to our fourth quarter call.

The preceding discussion include forward-looking statements that are subject to known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those contemplated by the forward-looking statements. Additional information concerning the factors that could cause such a difference is included in our press release issued earlier today as well as in our Form 10-K for the year-end December 31, 2022, that is filed with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are cautioned not to place undue reliance on forward-looking statements.

In addition, in accordance with SEC rules concerning non-GAAP financial measures, the reconciliation of our economic earnings and economic earnings per share to the most comparable GAAP measures is included at the end of our press release issued earlier today.

So that somehow got left off in front of the call. So I want to make sure I included it. And I’ll just conclude with a few remarks. Since we had no questions.

This was an unusual quarter for us for sure. We had significant deal costs associated with the Salient transaction, which were over $7 million for the year and about $5.5 million of that hit in the fourth quarter. We also took a write-down on our ownership interest in Charis Bank. Charis Bank is in the process of being acquired by Vista Bank, which is a 100-year-old bank with great financials.

We’re excited to partner with Vista Bank going forward. And in fact, they are subleasing some of our space, and we’ll be sharing some of our common areas. So we anticipate a much higher level of engagement and expect to have a great opportunity to cross-refer business to each other. The good news on revenues for the Salient transaction is that they came in as expected, with over $3 million in revenues for the brief period from end of November 18th to December 31st.

Our pipeline looks good, and at the institutional, there’s about $350 million of late-stage and early-stage opportunities. The wealth business has over $100 million of near-term opportunities. And the intermediary team is very excited. They met last week in Florida, had a sales meeting, I went to New York and met with one of the wirehouses spent a whole week there. They’re truly fans of Salient and Broadmark, and so the team is really excited about the prospects going forward. We’ve added some interesting technology to help us better identify leads and improve our success rate.

So that concludes our call for today. If you have any further questions and you want to reach out directly to myself or to Terry, please do so or visit our website at westwoodgroup.com. Thanks for your time.

Operator

Thank you all for participating. This concludes today’s program. You may now disconnect.