Cohen & Steers Inc (CNS) 2005 Q1 法說會逐字稿

Good morning and welcome to the Cohen & Steers First Quarter 2005 Financial Results Conference Call.

(OPERATOR INSTRUCTIONS.)

I would now like to turn the call over to Mr. Sal Rappa, VP and Associate General Counsel. Please go ahead, sir.

Thank you. Welcome to the Cohen & Steers First Quarter 2005 Earnings Conference Call. Joining me are Co-Chairman and Co-Chief Executive Officers Martin Cohen and Robert Steers; our President, Joseph Harvey; our Chief Operating Officer, Adam [Derishen]; and our Chief Accounting Officer, Victor Gomez. I’d also like to introduce our new Chief Financial Officer, Matt Stadler, who started with us this past Monday.

Before I turn the call over to Marty, I’d like to make the following remarks. Yesterday, we issued a press release announcing first quarter financial results. The press release, which is available on our website at cohenandsteers.com, contains information that we believe is useful in helping you evaluate our performance during the quarter.

I want to point out that during the course of this conference call we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties, and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. We believe that some of these factors are described in the Risk Factor section of our 2004 Form 10-K. I want to remind you that the company assumes no duty to update any forward-looking statements.

Finally, this presentation will contain information with respect to investment performance of certain of our funds. I want to remind you that past performance is not a guarantee of future performance.

This presentation will also contain information about certain funds that have filed registration statements with the SEC which have not yet become effective. This communication shall not constitute an offer to sell, or the solicitation of an offer to buy these securities.

For more complete information about the funds we will discuss today, including charges, expenses and risks, please call 1-800-330-7348 for a prospectus and see the press release issued yesterday.

With that, I’ll turn the call over to Marty.

Thank you, Sal, and good morning everyone. I’d like to preface my remarks by mentioning that, while the purpose of this call is to review our first quarter earnings, we see it as an equally important opportunity to update you on the progress with respect to our execution of our business plan. First, I’ll go right to the numbers.

Net income in the first quarter was $7.1 million, or $0.18 per share. That result is after the deduction of $1.8 million pre-tax, or $0.03 a share in non-recurring expenses that were associated with the launch of 4 new mutual funds during the quarter. Because we were a private company a year ago, earnings comparisons are not very meaningful. Revenue and asset levels, however, are.

In the quarter, our revenue of $34.1 million represented at 25% increase over 2004 first quarter revenue, and grew 6% compared to the fourth quarter of last year.

Assets under management grew 14% to $17.8 billion at the end of the first quarter, and that increase was compared to 2004 first quarter levels. Our asset levels declined slightly from $18.3 billion at the end of 2004. I’ll talk more about that in a minute.

But I’d like to go right to -- now some strategic development. We continue to execute our growth plan. That plan essentially is to build out our platform to offer a diversified array of high income equity portfolios. With the addition of 4 new mutual funds during the first quarter, Cohen & Steers now offers 16 mutual funds in total. These include 9 closed-end funds and 7 open-end funds. In addition, we have over 80 institutional relationships, 40 of which are in separately managed accounts. Whereas in the past, many have viewed us as a company with a narrow product offering, we think that this progress demonstrates that we are anything but that today, and have that wide array and growing.

A key part of our growth plan has been to expand our platform globally. As you know, we acquired our interest in Houlihan Rovers late last year, and we are already off to a great start in integrating our two firms and raising capital.

We launched a global closed-end real estate fund in March that raised about $300 million. Also in March we launched an open-end international real estate fund.

Houlihan Rovers’ assets under management increased by 40% in the first quarter to almost $800 million. That includes $148 million that they sub-advised for Cohen & Steers funds. I should mention that Houlihan Rovers’ assets under management are not counted in Cohen & Steers’ assets under management. Importantly, Houlihan Rovers has begun to contribute to our bottom line as well, and Joe Harvey will talk about our financial results in a minute.

The second leg of our global expansion program has been the opening of our Hong Kong office. We see a huge opportunity in Asian real estate securities. This includes countries like Singapore, Japan, Hong Kong and Mainland China, and having this office in Hong Kong gives us access to first rate investment research and investment capabilities in Asia. With our office now in Europe and in Asia, we’ve truly built that global platform.

And I should mention that, not only do we have great investment and research capabilities, but it is our plan to include marketing capabilities that will enable us to sell both our U.S. and non-U.S. investment services around the world.

Further progress on our diversification initiatives were demonstrated by our launch of our Dividend Majors Fund in January. This raised about $250 million in a close-end vehicle. This is a fund that invests primarily in non-real estate companies, but high income-oriented equities. That Fund’s success, we think, demonstrates the strong brand that Cohen & Steers has built and its association with high-income equities. And it also reflects what we believe is growing investor appetite for dividend income. This whole notion is supported by the demographic situation, which we’re all familiar with, but also the low return environment that was with us and the new 15% federal tax rate on qualified dividends.

Finally, we’ve put a lot of building blocks in place with respect to our growth and our infrastructure. And I’ll mention the most important, I think, in the past quarter was that of adding Matt Stadler as our CFO. Matt’s a highly experienced public company CFO and we expect him to take us to the next level as a public company.

Matt was the CFO of Neuberger Berman right after they became a public company five years ago, and had been with Lehman Brothers after they had acquired Neuberger. He is already on staff. He is here today, as Sal mentioned. He’s making a big contribution and we hope that you’ll all get to know him in the future.

Let me give you some color on funds flows because I think this is an important aspect of our business plan. The positive flows that we had in the quarter primarily came from the launch of the two closed-end funds that I just mentioned. Those net flows were $573 million. Offsetting this was the depreciation across the board of most securities because of capital market conditions in the first quarter.

The positive net flows in our close-end funds were $604 million. Let me restate what I said previously. Our total net flows as a company were $573 million; $604 million of our total flows were in our closed-end funds. That dividend majors in our worldwide reality income fund.

Please be advised that we will add another $150 million this month as we add leverage to our worldwide realty funds. So, there’s a built in growth factor in the second quarter.

Closed-end funds today constitute over 51% of our assets. As we have mentioned repeatedly, these assets are extremely stable and we’re very pleased to have penetrated this market so successfully.

Our open-end funds had modest net outflows in the first quarter. Those net outflows were about $5 million. And the negative flows came out primarily from Cohen & Steers Realty Shares and Cohen & Steers Realty Income, our two largest real estate mutual funds.

Offsetting this, however, was that our utility fund flows have been extremely strong, with net subscriptions in the first quarter alone of $63 million. Our utility fund has been one of the top gatherers in the utility fund universe over the past year.

Like the Dividend Majors, we expect the utilities fund to see continued growth as investors seek the safety of that asset class and the current income that utilities offer. Just one year after launching this fund, that the assets in our open-end utility fund are about $120 million. We think that’s a great start.

Our International realty fund subscriptions -- now these are not included in the first quarter, but I’d like to mention that we’ve attracted in barely a month over $25 million in new assets in our open-end international realty fund. So, as I think we can demonstrate, the benefits of our product diversification strategy are starting to pay off. Whereas we may have net outflows in some of our funds, we are offsetting that with net inflows into new strategies and we expect that to continue in the future.

In our separate accounts we also had modest net outflows. Those outflows were $26 million. But I think it’s important to mention that we did not lose any clients; in fact, we rarely lose clients in our institutional business. Rather, we’ve seen a continuation of a reallocation process that we’ve been seeing for some time. Those institutions being probably the strictest adherence to an asset allocation model and, for many of them, we’ve more than doubled there money in the past couple of years and it makes a lot of sense that they reallocate to other assets. So, we think the outflows have been quite modest and we feel good about the future of that business.

In summary, we think our strategy is working. We’ve broadened out our investment products. Those position us for continued growth. And importantly -- and I think this is a message in our first quarter results, is that we are very committed to continue investing in that growth. That is what will build our platform long term. It’s enabling us to exploit our strong distribution relationships at home. And in addition, as I mentioned, we’re vigorously pursuing new distribution relationships, particularly overseas.

With that, I’d like to turn our presentation over to Joe Harvey, our President, to briefly review some of our financial highlights.

Thank you, Marty, and good morning.

Just by way of overview, we’re pleased with our financial results, considering in the volatility in the equity markets in the first quarter. We experienced strong revenue growth year-over-year, as Marty mentioned earlier. Because we went public in August of last year, it’s difficult to compare our expenses on a year-over-year basis.

2005 will be a year where we continue to invest in our business for future growth, and this will be not only in personnel but also in infrastructure. And I’d mention that we’ve had excellent success so far this year attracting talented professionals in all of our different departments. These are people who are looking for opportunities to advance their careers in a growing and entrepreneurial company.

Turning to our income statement, I’d like to start with some comments on revenue. In the first quarter of 2005, our revenue was $34.1 million, which represents a 25% increase over the prior year. Ninety-two percent of this revenue came from our asset management and portfolio consulting business, and 8% came from our investment banking business. Due to a decline in investment banking revenue compared to last year, our overall revenue growth rate at 25% in the quarter was lower than the growth rate in our asset management revenue. Looking at first quarter of this year, asset management revenue increased 37% compared to the prior year, and the most significant driver in revenue growth was the increase in our closed-end fund advisory fees.

Just a couple of comments on the investment banking business. In the first quarter, their results improved versus the fourth quarter of last year, and that improvement has continued into the second quarter. Just to put that into perspective, in fourth quarter of last year the revenue was $1.5 million. In the first quarter of this year, it was $2.9 million. And to date in the second quarter, they’ve already booked $3.7 million in revenue.

Remember that the investment banking fees can be uneven through the nature of the business. Looking at their activity in the first quarter, they generated fees from two equity offerings for public companies, and one fee from a merger advisory assignment for a public company. These fees in the first quarter came from three different industry groups; one from a nursing home sector, one from the assisted living sector, and one from the real estate sector.

Turning to operating expenses, I’d first like to note that, when you look at the compensation and benefits line item, you should note that we have condensed both compensation of benefits and stock-based compensation relative to the fourth quarter report of last year.

Looking at the first quarter of 2005, we believe it’s a good snapshot of where our compensation expense is today before factoring in the continued growth in our business. The first quarter also reflects the first full quarter of our stock-based compensation plans, which were put into place at the end of 2004.

Compensation expense in the first quarter of this year is higher than that of the fourth quarter of 2004, primarily due to two factors. The first, in the fourth quarter of last year compensation expense was reduced by the reversal of $3.9 million pre-tax in stock-based compensation expense. The second effect was, looking at the fourth quarter of last year, compensation expense was lower due to the reversal of previous accruals for cash-based compensation throughout 2004 that we accrued as a private company, but then was ultimately paid in restrictive stock units at the end of the year.

Looking at G&A expense, there are several factors that you should consider. In the first quarter of 2005, G&A included $1.8 million for organizational expenses for foreign and mutual funds. We view these as one-time organizational expenses that are really investments in our business.

Second, due to our continued growth we are moving to a larger space this year, which will increase our G&A expense. Our second lease has commenced so, until our existing lease expires in November of 2007, we will be expensing rent for two headquarters. The new lease will increase pre-tax expense by approximately $4 million in 2005, and $2.5 million both in of 2006 and 2007. I’d mention that we are marketing our space for sublease, but have not factored in any rent on a sublease into the figures that I just gave you.

One final note on G&A is that we will incur additional expense for Sarbanes-Oxley this year, and that should be around $600,000 in 2005.

A couple of other notes on our statement of operations. This quarter was the first full quarter with our Houlihan Rovers investment. They earned about $300,000 in the quarter on a pre-tax basis. That will appear in our statement of operations as equity and income of affiliate, which is shown on an after tax basis. But if you look at their pre-tax earnings, and you annualize it for the quarter, we generated about a 14.9% return on our investment in Houlihan Rovers, and we expect that to grow over time.

A couple other points on the statement of operations. As Marty mentioned, we’ll be opening a Hong Kong office to conduct research in conjunction with our global real estate securities efforts. That should add around $1 million to our expenses. This should commence in May and will ramp up to the full $1 million pace sometime in the third quarter.

I’d also note that in our presentation we’ve also consolidated amortization of tangible assets with the depreciation in amortization line item. So, in the first quarter, this line item included $1.1 million in amortization related to non-compete agreements that expire in January of 2008.

Turning to the balance sheet, I’ll just make a couple comments. First, we’re in a very strong financial position. We have ample resources to fund our business plan. At March 31st, cash and marketable securities totaled $112 million, and that compares with $100 million at year-end 2004.

Just to give you a sense, if you look at the earnings in our cash on a run rate basis, we’re at about a 3.7% return on a pre-tax equivalent basis, and that assumes a 42% tax rate.

Looking at net working capital at the end of the first quarter, we had $105 million in working capital compared with $103 million at year-end 2004.

So, that completes my review of the financials. Next quarter you can look forward to Matt Stadler providing the financial review, and we look forward to introducing him to all of you.

Let me just turn it back to Marty for a couple remarks, and then we’ll open the lines up for questioning.

Great. Thanks, Joe. And I hope you’ve gotten a very good picture of where we are this quarter and where we’re headed for the rest of this year and for the future. We continue to build for future growth and we’re a very strong, very flexible company and we’re using that to our advantage.

So with that, any questions, we’d be happy to entertain.

(OPERATOR INSTRUCTIONS.) Cynthia Mayer of Merrill Lynch.

I noticed that the institutional or the separate account outflows slowed down quite a bit in the quarter, and I’m just wondering whether you think the rebalancing is done for now? And also in general, can you give us any sense of what you saw in terms of flows in April?

Well, Cynthia, hi. It’s Bob. Absolutely, the institutional rebalancing has definitely slowed down. It may not be over yet, but I think we are -- it seems like we’re coming near the end of that process. Obviously, market psychology comes into play here. And though we’ve seen a nice recovery and reached share prices since the end of the first quarter -- and I think that’s a very favorable development, you just never know. But, it feels pretty good. As you know, our performance, particularly in the REIT area, has been terrific. So, I think all of the factors I think make us optimistic, but you never know.

Okay. And in terms of April, can you give us any sense of what you saw?

Cynthia, April flows has not showing any material difference from what we’ve seen at the beginning of the year and towards the end of last year, so there’s nothing really significant to report there.

I will mention that our international initiative is something that has enabled us to capture assets that might be leaving the real estate area, the U.S. real estate area. We’re seeing this in our mutual funds, where we may get redemptions from one of our legacy U.S. funds, but that’s turning into subscriptions into the international funds.

Also, we are seeing some of our institutions, some of these relationships reducing their domestic allocation, but making a new allocation to international. We think that this initiative will be responsible in maintaining a lot of our assets that might otherwise be reallocated.

Interesting. Maybe you’ve mentioned this already, but are you going to be hedging your international investments, or are they going to have the advantage of a declining dollar if the dollar declines further?

We don’t engage in hedging. Basically, those who want to invest internationally either want that exposure or, if they don’t, they do the hedging themselves.

Okay. And just a little more on your plans to expand the Hong Kong office with marketing. Can you give some sense of timing on that? And just in terms of strategy, how do you go about -- I’m not sure what percentage of your clients now are non-U.S., but how do you go about doing that when it’s such a huge market?

Well, the first step is to have a presence there. And I think with Derek, we have probably the best Asian real estate analyst out there. He will be building a staff of three or four people to assist him in the research and investment process. And in the meantime, he’s also -- the first step is to have the person there, so you’ve got to be present. And then from there, we will be talking to marketing people. I can’t give you an exact date. I would like to, because I think we’d all like to have something in place by the end of the year, but that’s our goal.

And Cynthia, I would just add that that initiative is just one piece of our global plan to enhance our marketing and sales effort in the existing Houlihan Rovers affiliate where they already have, obviously, marketing people, but we’re expanding that significantly. As well as, we do currently have clients in Japan and that is also an initiative that is out there that is part of our global plan to add marketing in addition to investment research.

Okay. And just lastly, do you have any closed-end funds in registration and what’s the outlook on that now?

We do not have any closed-end funds in registration. We do have one-open end fund in registration, which is a dividend strategy fund. But on the closed-end side, we are working on several ideas, but don’t have anything to talk about at this time.

Glenn Schorr of UBS.

Quick question. On the launch of the new product, is there anything that flows through on the revenue side for distribution service fee or portfolio consulting, anything like that? Or is it strictly just on the cost side?

Nothing related to the start up of those funds, Glenn. But where we have open-end funds and sell A shares, C shares, there should be some distribution and service fee revenue as we receive subscriptions in those funds.

Gotcha. But nothing material, it sounds like, in this quarter? I’m just trying to make sure that -- how the $1.8 million goes on--.

Yeah, I think that you could consider that as one time expenses. Bear in mind that our worldwide realty fund closed on March, what, 26th?

31st.

31st. So, we’ve collected almost no revenue from that, but we did have the expenses. And our dividend majors fund closed at the end of January. We didn’t collect a full quarter of revenue there. So -- consider the 1.8, though, one time.

Got it. Tax rate. New York [based] company that makes a lot of money, high classed problem to have, but nice sized tax rates. Is there anything you can do to help bring that down over time? I don’t know if the Hong Kong office is going to help at all?

If we establish investment groups outside of New York, and they’re managing assets that can help reduce the tax rate, but we’re not in a position right now where that’s going to have an effect on the 42% rate.

Gotcha. You mentioned in your comments about pursuing other -- or standing distribution overseas, and I don’t know if that’s up through Houlihan specifically, or for the whole company. But, I’m just curious. Which channels are most [attracted]? Does that mean the bank channel?

Each continent has its own distribution model, if you will. In Asia -- like, take Japan. In Japan, you have to have relationships with various distributors of your product. And we already have one very strong relationship there and we’re using that relationship to create new investment products to put through that channel. It would be similar in other Asian countries. In Europe, it’s not as much distributor-related, it’s bank-related and we’re working on those relationships. So, I think that’s about as succinct a model as there is.

I think in Europe, the Houlihan Rovers name is pretty well known institutionally. It’s the bulk of their assets. And so as I said, we’re going to work to enhance that, but also try to initiate some relationships that can help in the high net worth area, country by country. And as Marty said, there are other unique opportunities we’re pursuing, such as in Australia, where the appetite for real estate asset class is very strong, particularly institutionally.

Got it. And a last quickie is the double-rent carry. You had mentioned $4 million for ’05, $2.5 million each for ‘06 and ’07. That obviously -- that starts now and that assumes no releasing, is that correct? So in other words, it’s going to improve.

The second lease commenced in March. It assumes no sublease revenue. And it does -- the $4 million this year includes impairment of our lease here, as well as moving expenses in the fourth quarter.

Okay. That’s helpful. Just in terms of how we think about spreading it, there’s a move component, but then the rest gets spread across the year? In other words it might be--?

Yes, I think that’s a fair assumption with a little more in the fourth quarter for the moving expense.

Daniel Goldberg of Bears Stearns.

This is Andrew Lees. Just a few questions. We see that the revenue capture number for the open-end funds sort of ticked down a bit sequentially. Is that more of a mix issue or performance fee related? Can you give us a sense on that?

We have no performance related fees.

[Inaudible] 77 to 78 basis points. Really not a material change. It’s just more of a function of the way the flows ended up in the funds themselves.

Okay, great. On your press release, you mentioned that you received approval from the NASD to DO firm commitment underwritings. Can you give us some color on what the impact would be?

Well, it’s hard to know exactly, though the idea here is to, as part of our strategy, to help grow but also smooth out some of the revenue stream from the investment banking group. Obviously, it’s impossible to predict both the size and the frequency of the revenues there. But our intention is to be involved, certainly as a co-manager, on many of the capital raising opportunities, particularly in the REIT area. And we’re optimistic, but we don’t have anything specific, any guidance that we can give you there.

There’s no real cost to this. I mean, we do have a capital requirement, but that’s just cash that we keep on our balance sheet anyway. So, there’s no incremental cost to this. It does enable us, though, to become a co-manager and generate revenue.

Okay, great. Just a follow-up on Cynthia’s question. Can you just -- with long-term rates sort of turning back down a bit in April, can you give us a sense as to your overall fund performance through April and for your expectations in Q2?

Well, in April, rates were up about 6%. And since the majority of our assets are REITs, then we enjoy that rebound in the REIT market. Where it goes from here, we just don’t know. In terms of utilities, they’re really in a sweet spot in what we believe is a multi-year fundamental recovery, and those securities are performing extremely well this year.

(OPERATOR INSTRUCTIONS.)

At this time, I’m showing no further questions.

Well, great. Thank you all for listening and we look forward to staying in touch with you, and we wish you all a great day.

Thank you. This does conclude today’s conference. You may disconnect your lines at this time, and have a wonderful day.