Bridge Investment Group Holdings Inc. (NYSE:BRDG) Q4 2022 Earnings Call Transcript

Bridge Investment Group Holdings Inc. (NYSE:BRDG) Q4 2022 Earnings Call Transcript February 15, 2023

Operator: Greetings, and welcome to the Bridge Investment Group Fourth Quarter 2022 Earnings and Acquisition of Newbury Partners Conference Call. As a reminder, this conference is being recorded. I would now like to turn the call over to Bonni Rosen, Head of Shareholder Relations. Thank you. You may begin.

Bonni Rosen: Good morning, everyone. Welcome to the Bridge Investment Group Year-end and Fourth Quarter Conference Call. We will also discuss our planned acquisition of Newbury Partners. Our prepared remarks include comments from our Executive Chairman, Robert Morse; Chief Executive Officer, Jonathan Slager, Chief Financial Officer, Katie Elsnab; as well as Chris Jaroch partner of Newbury Partners. We will hold a Q&A session following the prepared remarks, where we will be joined by Chris Jaroch and Richard Lichter, Founder and Managing Partner of Newbury Partners. This morning, we posted a press release and investor presentation on our website with details on the Newbury transaction. I’d like to remind you that today’s call may include forward-looking statements, which are uncertain and outside the firm’s control and may differ materially from actual results.

We do not undertake any duty to update these statements. For a discussion of some of the risks that could affect results, please see the Risk Factors section of our Form 10-K. During the call, we will also discuss certain non-GAAP financial metrics. The reconciliation of the non-GAAP metrics are provided in the appendix of our supplemental slides. The supplemental materials are accessible on our IR website at ir.bridgeig.com. These slides can be found under the Presentations portion of the site along with the fourth quarter earnings call of event link. They are also available live during the webcast. I will present our GAAP metrics and Katie will present our non-GAAP data. We reported GAAP net income to the operating company for the fourth quarter of $18.2 million and $272.4 million for the full year 2022.

GAAP earnings per share was $0.92 for the full year 2022 with a GAAP loss per share for the fourth quarter of $0.04. It is now my pleasure to turn the call over to Katie.

Katherine Elsnab: Thanks, Bonni, and good morning, everyone. It’s an exciting day for Bridge. I will review our financial highlights from the 2022 earnings announcement this morning, followed by Bob and Jonathan with macro commentary on our markets and operations. Bob, Jonathan and Chris will then introduce the Newbury Partners and share details on how Bridge and Newbury will work together going forward. From a macro perspective, 2022 was a challenging year. We experienced the highest levels of inflation in decades. As a result, central banks around the world shifted policy from low interest rates and quantitative easing to aggressive rate increases and concurrent monetary tightening. In addition, the world experienced increased geopolitical risks from the expanding conflict between Russia and Ukraine and economic slowdown and now subsequent reopening in China and other developments weighing on global capital markets.

Despite a challenging backdrop, Bridge delivered meaningful positive growth across our key metrics for 2022. FRE to the operating company increased to $158.3 million powered by 37% growth in recurring fund management fees, which more than offset a decline in transaction fees. Operating expenses were up 37% year-over-year as our platform continues to scale. We added to our relatively new logistics, solar and PropTech teams, augmented our ESG and compliance efforts, and at the same time, we’re cautious on employee compensation and other expenses. Notwithstanding investing for growth, which has already started to occur in these new verticals, our fund management fee revenue outpaced this growth by 5%, showcasing our operating leverage and cost discipline.

Distributable earnings to the operating company increased to a record $187.9 million, with after-tax DE per share of $1.10, a 24% increase from 2021. This increase was driven by our continued growth in fee-earning AUM and fee-related earnings. Distributable earnings for the fourth quarter were $35.6 million, with after-tax DE per share of $0.21. We declared a dividend of $0.17 per share, which will be paid to shareholders of record as of March 10. The rapid rise in interest rates led to a repricing in the asset markets in which we participate and a significant decrease in lending activity during the second half of the year. A widening bid-ask spread in property transaction markets made it difficult to value assets and close investments. This has impacted deployment and to a lesser extent, our capital-raising activities.

With respect to deployment, we have been patient as markets corrected in the second half of 2022. As a result, our transaction volumes, along with the entire market were down, and we took a view that our $3.5 billion of dry powder would be deployed at better values in the future. Although transaction fees and realized performance fee revenue may remain muted in the near term due to the short-term market conditions, the underlying fundamentals of our business remain healthy. For example, our Multifamily and Workforce assets, which represent 34% of our fee-earning AUM are 94% occupied and the same-store effective rent growth for 2022 over 2021 averaged above 15%. Fundamentals in our latest single-family rental portfolio are similarly strong, with 7.4% growth in NOI for 2022 and 96% occupancy.

Logistics, which is a growing component of our AUM, continues to experience historically low vacancy rates, particularly in the coastal and gateway infill markets in which we primarily invest. This, in turn, has continued to support double-digit rent growth, which we think will persist into 2023. Now turning to investment performance. Our equity real estate funds, which are mostly value-add strategies, depreciated 4.8% in the quarter and 1.7% for the year as we’ve continued to increase cap rate assumptions in the rising rate environment on unrealized investments. These cap rate increases have been largely offset in many cases by rent growth and we continue to see strength in the underlying value-add sectors in which we invest. In addition, we generally have the ability to hold assets through the market volatility, and we believe our funds are conservatively and appropriately capitalized.

We are focused on the long-term value we provide to our limited partners and are confident that we continue to add value to the assets in our funds. We achieved solid fundraising results in Q4 of $518.1 million, bringing inflows to $4.5 billion for the year in what was a more difficult backdrop for raising capital. During 2022 through January of 2023. We also completed final closings for the latest vintages of our debt strategies, Multifamily and Workforce and Affordable Funds at record levels. We expect Debt Strategies IV will be fully invested in the coming months as we continue to find attractive investment opportunities amidst the turbulence of the credit markets. In the fourth quarter, we bought $633 million of investment-grade CRE, CLO and CMBS bonds with a weighted average spread of SOFR plus 436 basis points unlevered.

These highly risk-mitigated investment-grade bonds were all floating great and are seen here in the capital structure, that exhibited outside deals due to the general illiquidity in the securitization markets during the quarter. We continue to have productive dialogue with our investors related to this strategy. We had momentum in Q4 from several of our strategies with $167 million committed to opportunity on Fund V, $44 million to net lease income and $42 million to AMBS. We ended the year with gross AUM of $43.3 billion and fee-paying AUM of $17.3 billion, an increase of 19% and 30%, respectively, from 2021. With $3.5 billion of dry powder, we are well positioned to fully deploy capital for our funds at we believe is an attractive point in the cycle.

Our value-add platform is built for such market environments. We also feel good about our fund capital base with 98% of our fee-earning AUM in long-term closed-end funds, which have no redemption features and a weighted average duration of 7.7 years. This significantly inflates Bridge from the redemptions currently seen by those who have more exposure to retail open-end vehicles. Approximately 90% of our fee-earning AUM is invested in high-conviction themes, which include residential rental in the U.S. across Multifamily, Workforce and Affordable Housing, Single-Family Rental, Senior Housing and in our private credit strategy where the majority of the collateral is Multifamily related. While the market environment has been volatile in the past few months, we continue to believe that the U.S. real estate alternative offers investors resilient, recession resistant downside protection, durable inflation-protected yields and the potential for meaningful capital appreciation.

With that, let me turn the call over to Bob.

Robert Morse: Thank you, Katie. We are pleased to discuss our strong year-end 2022 and fourth quarter results and the definitive agreement to acquire Newbury Partners, one of the largest and, in our view, highest quality and best performing independent secondaries firms. The transaction is an exciting next step in our strategic plan to grow both organically and inorganically to thoughtfully expand our investment platform in an attractive and growing asset class. Before reviewing the strategic rationale for the Newbury transaction and the macro environment in which we expect to operate in 2023, I wanted to highlight selected achievements in 2022. We achieved record closes in 3 established Bridge verticals with Debt Strategies IV at $2.9 billion, Multifamily V at $2.3 billion with a final closing that occurred in January; and Workforce and Affordable Housing II at $1.7 billion, highlighting the confidence investors place in our best-in-class investment teams.

Both Multifamily V and Workforce and Affordable II are the largest specialized funds of their kind, and positioned to participate in the continued opportunities around housing in the U.S. The predecessor funds for each of these are ranked in the top quartile in performance by Preqin for their sizes and vintages, illustrating the value of specialized focus and forward integration, both of which, in part, define our approach to the real estate markets. We will launch in first quarter 2023, successor vehicles in our established logistics, office and health care verticals as well as our debt strategies vertical since Debt Fund IV is expected to be over 85% deployed. We have assembled outstanding investment teams and launched new strategies in Renewable Energy and PropTech to further expand our scope and have enjoyed early success in those efforts.

And finally, we completed 1 strategic acquisition in the complementary Single-Family for rent sector. We’re starting strong in 2023 with the planned Newbury acquisition, to expand into the attractive and growing secondaries sector with an outstanding management team and an enviable track record of success. 2022 was an unusual year from the perspective of commercial real estate. Counter to the typical pattern where volumes are greater in the second half than the first half of the year, 2022 started with a bang and ended with a whimper. At the beginning of 2022, transaction volumes were high, price expectations from sellers were high and buyers were plentiful. In the first half of 2022, we sold $745 million of assets, contributing to $31.6 million of realized performance fees.

In the second half of 2022, we were very selective on monetizations as well as deployment, yet we remained actively engaged with brokers, sponsors and lenders seeking attractively priced opportunities. We expect to see more of these as 2023 progresses, hopefully culminating with a much more steady and active market by the second half of the year as the capital markets stabilize. As we look ahead, we see green shoots, particularly in the U.S. with a resilient labor market and healthy consumer metrics. We’ve also started to see some evidence of inflation easing with the personal expenditures price index rising just 5% in December, the slowest annual gain since September 2021. We’ve already seen the Fed slow the pace of rate increases from 75 basis points to 25 basis points, and treasury yields come down by almost 100 basis points from their highs.

If these trends continue, this will bring much needed price discovery back to the market, which would increase the velocity of commercial real estate transactions as we progress further in 2023. In commercial real estate, our outlook focuses on sectors with long-term demand drivers and opportunistic plays that may come in the form of broken capital structures or repositioning of assets. We expect to see some attractive near-term opportunities albeit in a slower deployment market, followed by a significant increase in activity later in the year as the capital markets stabilize. Our long-term strategic intentions are to continue to grow organically as we’ve done in our established verticals and combine organic growth with carefully curated acquisitions.

The alternative asset management space is fragmented and consolidating and we believe offers significant opportunities. Over the course of 2022, we evaluated numerous opportunities before focusing on Newbury Partners. We have seen that the weakness in the capital markets in the third and fourth quarters of 2022 accelerated the desire of smaller managers to consolidate, and we believe this trend is just beginning. We selected the secondaries sector as one of the most attractive and believe that the Newbury team, investment philosophy and process fit hand in glove with how Bridge has navigated successfully since founded. We and others see significant opportunity within the high-growth secondaries market. The alternative asset sector has grown rapidly over the past decade with more than $13.3 trillion in assets under management by alternative managers and is expected to grow at double-digit rates for the next 5 years.

As liquidity needs evolve for investors, demand for secondaries solutions has accelerated. The secondaries market has grown dramatically in recent years with $132 billion in volume in 2021, up 120% over 2020 with a healthy $108 billion of volume estimated for 2022, and the market is projected to grow at a 22% compound annual growth rate through 2026 per a Morgan Stanley research report. The current macroeconomic environment along with the gap between public and private market pricing has only increased the need for LPs and sponsors to seek secondaries solutions to rebalance investment allocations, extend fund durations to weather price volatility, gain liquidity or streamline portfolios. In turn, LPs and secondaries funds benefit from outsized current cash yields, instant exposure to PE asset classes with limited to no J curve, high diversification and structural value protection from buying below NAV.

With Newbury, we will diversify our product offering and add significant assets to the Bridge platform. The transaction also represents an opportunity to expand our investment offerings to both Bridge and Newbury investors by developing real estate secondaries funds as we combine Bridge’s real estate underwriting expertise with Newbury’s sterling reputation as a leading secondary market investor. We are excited about this value-enhancing transaction and see a number of opportunities to scale together in today’s secondary market. We look forward to working closely with Newbury’s highly experienced management team, and we are confident that our firm’s shared values, proven track records, complementary areas of expertise will make for a seamless integration.

This positions Bridge to capitalize on the growing secondaries opportunity set and create significant near and long-term value for our investors. I’ll now turn the call over to Jonathan to more fully describe what Newbury does today and to walk through the financial terms of the Newbury transaction.

Jonathan Slager: Thank you, Bob, and good morning. We are delighted to announce the signing of a definitive agreement to acquire substantially all of the business of Newbury Partners and to enter into long-term employment contracts with the senior professionals who have managed the growth and success of Newbury since its founding in 2006. Newbury is the leader in the secondaries market with a focus on acquiring limited partnership interest in established buyout, growth equity and venture capital funds. Consistent with the way Bridge operates in its real estate investment funds, Newbury’s focus has been on small and middle market transactions, where there is less competition and more attractive pricing. Since its founding in 2006, Newbury has raised over $6.2 billion of committed investor capital across 5 dedicated funds.

The firm has executed more than 200 transactions, investing in over 500 underlying interest on behalf of limited partners. Newbury’s experienced management team has decades long track record of strong performance and has returned over $4 billion of cash distributions to investors since inception. Newbury’s investment performance has been strong and steady and has improved over time. Since the global financial crisis, Newbury funds that have started mark-to-market reporting have had gross annualized returns of greater than 20% and net returns of approximately 15% to 21%. Newbury’s best-in-class management team, middle market investment strategy and strong direct sourcing channel align with our strategy of investing in carefully targeted opportunities that allow us to drive better risk-adjusted returns.

Newbury has more than 250 limited partners worldwide, spanning pension funds and endowments, family offices and investment managers, among others. There is little overlap with Newbury’s limited partners and existing Bridge investors with less than 3% overlap of institutional clients invested with both firms. This allows significant cross-selling opportunities. We believe the Newbury acquisition is highly strategic and financially accretive to the Bridge platform. Newbury has approximately $5.2 billion in assets under management, which will bring Bridge to a total AUM of $48.5 billion. More importantly, fee-paying AUM, which represents most closely the true underlying growth of our business, will increase by 25% or $4.3 billion, bringing us to $21.6 billion as of December 31, 2022, based on combined year-end numbers.

For perspective, Bridge’s fee paying AUM at the time of our IPO was $10.3 billion. So post-closing of Newbury, this represents 110% growth in just 6 quarters. During 2022, Newbury generated $43 million of management fees and $28 million of fee-related earnings, with the duration of their fee earning AUM approximately 8 years. As a result, on a combined basis, we estimate our fee-related earnings would have been $192 million for that same time period, enhancing our FRE profile in a powerful way. In addition, Newbury generated strong estimated FRE margins of 65%, which will enhance the FRE margins for the combined business going forward. Overall, on closing, we expect the transaction would have been accretive to 2022 FRE and FRE margins. On an after-tax DE per share basis, we estimate the transaction would have been mid-single-digits accretive.

In addition to being immediately accretive to earnings, we are excited about the growth prospects of Newbury as we launch successor funds and expand our offerings in the secondaries sector. As we discussed in the past, we have long focused our shareholders on recurring fund management fees as a benchmark of our underlying growth and stability. We recognize that transaction fees can be more inconsistent and seasonal and we clearly saw that in 2022. Our annualized recurring fund management fees were $121 million at the time of IPO. And as of the fourth quarter of 2022, we are now at $200 million, representing 65% growth. When combined with Newbury, they are $243 million, which is more than twice our IPO level. We expect to continue to grow as we raise successor Newbury fund this year.

Additionally, Newbury has a loyal investor base with nearly 80% of its Fund V capital coming from repeat investors. With respect to the funding of the transaction, Bridge will provide $320 million in cash for substantially all of the business of Newbury, which includes the acquisition of existing management agreements and in-place workforce. We are not acquiring the carried interest associated with Funds I through V. However, we will earn carried interest on future funds and anticipate 40% of that carry attributable to our ownership in the platform will be allocated to the operating company. Bridge intends to fund this acquisition using existing balance sheet resources, including the $150 million of proceeds from the recent private placement of debt.

The private placement was priced in January and will include the issuance of $120 million of 7-year notes and $30 million of 10-year notes with a weighted average interest rate of approximately 6%. The note purchase agreement is contingent upon us closing the Newbury transaction and funding would occur at that time. We also expanded our revolving credit facility to $225 million with full capacity currently available. We expect the transaction to close in the first half of 2023 subject to customary closing conditions, including investor consents and regulatory approvals. I want to end our prepared remarks by reiterating how excited we are to be partnering with Richard, Chris, Warren, Gerry and the entire Newbury team. Their culture of teamwork excellence and specialization is aligned with our values, and we look forward to working together in the years to come.

This transaction is highly strategic for Bridge and provides another area of dynamic potential growth going forward. It is now my pleasure to turn the call over to Chris Jaroch of Newbury Partners to say a few words.

Christopher Jaroch: Thanks, Jonathan. As you know, we spent a lot of time thinking about the future growth and development of our business, and we are excited about the common vision and cultural fit between Bridge and Newbury. We believe that this partnership will accelerate our growth both within our existing investment strategy as well as into adjacent secondaries opportunities. The team at Newbury is confident that this transaction will position us for shared success, and we very much look forward to working closely with the entire Bridge team to realize the benefits of this complementary combination.

Robert Morse: Thank you, Chris. We are likewise thrilled about this new opportunity we have together. Operator, we will now open up the line for questions. Thank you.

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Q&A Session

Operator: Our first question is coming from the line of Michael Cyprys with Morgan Stanley.

Michael Cyprys: Congratulations on the transaction. Maybe just start off on the Newbury transaction. I was hoping you might be able to elaborate a bit more on the opportunities you see to scale the Newbury business. You mentioned cross-selling. How do you think about that? What does that take? Expanding into real estate secondaries I think another area, I think you also alluded to maybe some other products. Just curious how you think about doing that? What are some of the actions that you guys might take this year and into ’24? What does that require in terms of team build? And then I think you also alluded to raising a fund — a successor fund at Newbury. Just any sort of thoughts around the market environment for raising capital today there? And how you think about sizing that? And if that fund might scale just given the strong performance track record.

Robert Morse: Thanks, Michael. This is Bob speaking. I might start off a little bit and then ask Chris to elaborate as well. We have tried to be very both strategic and tactical as we look for opportunities to expand, and we feel that the secondaries — broadly speaking, the secondaries business is one that offers significant growth potential going forward. And our interpretation of Newbury’s history and track record is such that it sets the foundation for strong growth going forward. The Newbury team has created an enviable track record. They have a philosophy, a middle-market philosophy, if you will, that parallels so closely, how Bridge has created its track record as well. So we think that there’s a significant fit between our 2 firms in how to do business.

Newbury has just about completed the deployment of capital in their Fund V. So we collectively anticipate the successful launch of a Fund VI to continue precisely what they’ve been doing with their very strong list of investors. We, as Jonathan alluded to, would expect that we can do some significant cross-sell between our investor base and their investor base, both for raising capital for the secondaries business as well as raising capital for our fundamental real estate activities. But the secondaries business, like the real estate business has a lot of different aspects to it, focusing on PE, venture capital and buyout opportunities has been the main focus of Newbury. Looking backwards, we think that there’s meaningful opportunity in the more nascent, but growing real estate secondaries business.

It’s our view that the power of Bridge’s real estate expertise and Newbury’s secondaries expertise will create a strong entrant in that field. And there are other areas to focus on as well, whether it be infrastructure or other opportunities in the secondaries business. It’s a growing business. So we think that it adds to the various growth vectors that we already have in our quiver, and we believe that the Newbury team will be really effective in terms of capturing some of those opportunities. Chris, anything that you’d like to add there?

Christopher Jaroch: Well, Michael, first off, I’d say we’re delighted that the opening question is focused on our business and we’re delighted with this combination. And as Bob said, the secondaries market is really even in its middle innings of its tremendous growth. I mean when we started this business back in 2006, just the regular way private equity secondaries market was probably $10 billion or $15 billion in size, if that. Today, we’re looking at $100-plus billion markets year-over-year. So there’s been enormous growth in the business, but we think that the overall market still has another 2 to 3x in the next few years. And so there’s just tremendous underlying growth in the business. And so I think what we’ve been looking at going forward is, one, as Bob said, raising the successor fund to our Fund V, which was a $2 billion U.S. fund, and we’re looking forward to that imminent launch.