Cohen & Steers Inc (CNS) 2005 Q2 法說會逐字稿

Welcome to the Cohen & Steers second quarter 2005 financial results conference call. At this time all lines have been placed on a listen-only mode and the floor will be open for questions following today's presentation. I would now like to turn the call over to Mr. Salvatore Rappa, Vice President and Associate General Counsel. Please go ahead, sir.

Thank you and welcome to the Cohen & Steers second quarter 2005 earnings conference call. Joining me today are co-Chairmen and co-Chief Executive Officers Martin Cohen and Robert Steers, our President, Joseph Harvey, our Chief Financial Officer, Matthew Stadler, and our Chief Operating Officer, Adam Derechin.

Before I turn the call over to Bob Steers, I would like to make the following remarks. Yesterday we issued a press release announcing second-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 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 factors 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 any 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 we issued yesterday.

With that, I will turn the call over to Bob.

Thanks, Sal. Good morning, everyone. Thank you for joining the call here this morning. I'm just going to make a brief comment about the numbers in the press release and let Matt Stadler, our CFO, really run through the nuts and bolts of the quarter.

As I'm sure you have read by now, the headline number was net income in the quarter of 8.5 million, or $0.21 a share, and that included a onetime charge of about $0.02 a share. And as I said, Matt will run you through that. That compares to about $0.18 a share in the first quarter.

I do want to just comment on a couple of the topline numbers because we were fairly pleased with the trends in the quarter. Since we were private a year ago what I'm going to focus on are just revenues and assets under management, because being private, the year-over-year comparisons are not meaningful.

That said, our total revenues in the second quarter were 38 million, which represented a 49% increase over the prior year and 12% over the first quarter. Also, our assets under management rose to a record 19.9 billion in the quarter through a combination of positive flows and capital appreciation. And that represented a 33% year-over-year increase and 12% sequentially from the first quarter. So, obviously, we felt very pleased with the trends in the second quarter and so far this year.

Along those lines, I would like to make a brief comment as well on our investment performance. Year-to-date, virtually across the board our performance has been strong. Following 2004, which was our best performance year ever, particularly in the REIT sector, 2005 is so far also very strong. Year-to-date, all of our strategies are exceeding their respective benchmarks, except for utilities, which are just modestly behind theirs. Importantly, our Cohen & Steers Focus fund and Cohen & Steers realty shares were both upgraded by Morningstar to 5 and 4 stars, respectively, during the quarter. And obviously, we're very pleased with that.

I would like to turn to fund flows because there were some good trends in the quarter. We saw that assets increased sequentially by 2.1 billion, or about 12%. That said, we believe we still have much work to do to improve our sales in our open-end funds as well as in our institutional channel. Specifically, our open-end funds saw their assets under management increase to about 604 million, which was a 13% sequential increase from the first quarter. However, we enjoyed appreciation of 705 million, which suggests we had net outflows of about 100 million.

Peeling back the onion, what you see here is that our REIT funds, despite or maybe even because of our strong performance, had net outflows in the quarter. Redemptions are clearly the issue and we believe that similar to our institutional separate account business, we are seeing a rebalancing phenomenon where the continued strong performance of the asset class and our funds is causing the weightings and REIT portfolios to be unusually high. And we are seeing rebalancing or profit taking.

From a strategic standpoint, it's very important to point out that our international and utility funds had net inflows of $97 million. And importantly, the international fund is off to the most successful start of any open-end fund that we've launched year at Cohen & Steers. We believe that these results demonstrate the strength of our expanded product lineup and our strategy behind that expanded product lineup.

In the closed-end fund arena there's not a whole lot to report. Our assets under management grew by $881 million, or 10%, from the first quarter through both inflows and capital appreciation. Closed-end fund assets remain the largest segment of our business and are currently $10 billion, or about 50% of our asset base.

Turning to the institutional channel, we are making progress there. Domestic assets under management increased by 600 million to 4.4 billion in the quarter. And as I mentioned earlier, although we continue to see clients reduce their accounts as part of an ongoing rebalancing phenomenon, we actually had modest net inflows of about $30 million in the quarter.

In addition, we had a number of other positive developments. During the quarter we commenced management of a $35 million real estate securities portfolio for a large Japanese institution. Also, our international assets under management as represented by Houlihan Rovers increased 38% to 1.1 billion compared to 796 million in the quarter ended March. And just as a comment, we are seeing very strong demand, particularly on the part of institutions, for global and international REIT portfolios. And we view that as a very exciting opportunity for our institutional channel going forward.

I would like to finish my remarks by reviewing certain strategic developments that occurred during the quarter. Just as a reminder, as many of you know, our growth strategy heretofore has been to build out our product platform by offering an expanded array of high-end comp equity portfolios that take us beyond our core REIT expertise. In addition, we have been working to expand and improve our sales in the retail and institutional channels both here and abroad.

During the quarter we achieved a great deal of progress on all of these fronts and we began to slightly modify that focus. First, as we previously announced, Rick Helm joined Cohen & Steers to lead our large cap value portfolio management team. Prior to joining Cohen & Steers, Rick had managed the $2.2 billion WM equity income fund which is a 5 star Morningstar rated and Lipper Leaders fund. Through Rick and his team, we intend to offer a variety of portfolios that seek to achieve high current income and capital appreciation by investing primarily in dividend-paying common and preferred stocks using a disciplined value approach. Rick and his team will continue to be located in Seattle.

Also during the quarter we filed for Rick and his team the Cohen & Steers dividend value fund, and we expect this fund to commence operations later this month. Importantly, the addition of our value team marks the end of our current product extension plan. And while we will continue to be opportunistic, this largely fills out the range of dividend growth strategies that had been targeted in our original strategic plan.

So now our focus is shifting slightly to supporting and expanding our recently added teams, especially Houlihan Rovers and Rick Helm's team, and to expand and improve our retail and institutional distribution. With that in mind, a comment on our international team, where we continue to add to both research and support staff in Europe and in Asia as assets have continued to grow rapidly. This includes the addition of two analysts located in our Hong Kong office who will be following the expanding universe of Asian property companies.

Turning to institutional marketing, Steve Dunn joined our firm in July as the Senior Vice President and Director of Institutional Marketing. Steve has over 20 years of financial service industry experience and has a mandate to build out our institutional team to focus on consultant relations and institutional sales. Long-term, we definitely expect the institutional channel to be as important as retail as part of our strategic plan to build out our institutional sales capability on a global scale, lead by Steve in the U.S. and Joe Houlihan in Europe.

Also, we have recently entered into an agreement with a highly regarded institutional third-party marketing firm called Ambassador Funds Management to represent us with consultants and institutions in Australia, where demand for U.S. and international REITs is extremely strong.

Looking at our retail channel, we had a very active quarter with Kevin Crook, who joined us in the first quarter of this year as our Retail National Sales manager -- hired three new internal wholesalers and has instituted a wide range of new strategies to support our wholesaling team and improve sales.

Lastly, our investment banking group enjoyed a very strong quarter and served as a co-manager in two underwritten public offerings. And that represents the first two offerings that we have participated in as firm commitment underwriting transactions for our banking segment. Just as a reminder, we went down this path as part of a plan to both grow and smooth out the revenue stream coming from our investment banking segment.

So in summary, we think we had a very solid quarter. We made a great deal of progress. We achieved record revenues, net income and assets under management. We built out the product platform. We largely completed that buildout of the product platform. Major additions were made to both our retail and institutional sales and marketing teams, and that will continue. We have shifted our emphasis from primarily product expansion to improved productivity and asset gathering in all of our channels. And we think that the combination of our new and existing top-performing funds and products, along with our expanded sales capability, provides a very solid platform for us to grow the Company going forward.

With that, I'm going to ask Matt Stadler to run you through the details of the quarter. Matt?

Thanks, Bob, and good morning, everyone. We reported earnings of $0.21 per share, a 17% increase from the $0.18 per share we reported in the first quarter. These results include a $0.02 per share charge related to a recent change in the New York State tax law which resulted in adjustment to our net deferred tax asset.

For the quarter we recorded record revenue of 38.3 million, representing a 49% increase over the prior year's results and a 12% increase from the first quarter. Our net income for the quarter was 8.5 million, a 20% increase from our first-quarter results. As a result of solid asset growth during the quarter attributable to net positive inflows and strong performance, we recorded an all-time high of 19.9 billion in assets under management. Now I will review the performance of our two business segments.

First, in asset management we recorded quarterly revenue of 32.7 million, up 29% from the prior year's period and up 5% from the first quarter. Pretax income for this segment was 12.9 million, up 12% from last quarter. Now, let's analyze the changes in assets under management.

Assets under management in our closed-end funds totaled 10 billion at June 30, an increase of 881 million, or 10% from the first quarter. This increase was comprised of net inflows of 150 million resulting from the issuance of preferred shares for the purpose of establishing leverage in our worldwide realty income fund and 731 million of market appreciation.

Our open-end funds had assets under management of 5.4 billion at June 30, an increase of 604 million, or 13% from the first quarter. Net outflows of 101 million, which included 100 million account-transferred into our institutional separate accounts, were more than offset by 705 million of market appreciation.

We recorded 97 million of net inflows in our international realty and utility funds, continuing our efforts to diversify our investment portfolios beyond U.S. real estate securities. Gross inflows generated by our sales force into certain of our open-end funds totaled 118 million during the quarter.

Assets under management in our institutional separate accounts totaled 4.4 billion at June 30, an increase of 600 million, or 16%, from the first quarter. Net inflows of 30 million, which includes the 100 million transfer previously mentioned, as well as an initial 35 million contribution into a global securities institutional account, coupled with market appreciation of 750 million, accounted for the increase in assets.

Our strategic investment in Houlihan Rovers continued to contribute as their assets under management increased 38% to 1.1 billion at June 30 compared with 796 million at March 31, and increased 94% from the 569 million at December 31. Net income increased to 491,000 this quarter compared with 304,000 in the first quarter. As you know, we recorded 50% of Houlihan Rovers net income.

In our investment banking segment, we recorded quarterly revenue of 5.5 million, almost double the amount recorded in the first quarter. Pretax income for the banking segment was 2.5 million, up significantly from the 682,000 recorded last quarter. We recorded 4.2 million of M&A fees for providing financial advisory services and 1.3 million of capital-raising fees in connection with an agency placement of convertible preferred securities. In addition, during the quarter we served as co-manager in two underwritten public offerings, representing our first firm commitment underwriting transactions.

Moving briefly to expenses, we have increased our headcount during the quarter in order to support the rapid growth we have experienced resulting in record revenue and assets under management for the firm. The increased headcount, much of which occurred toward the end of the quarter, resulted in a slight increase in employee compensation from the first quarter. This, coupled with the proportionate increase in compensation in investment banking resulting from the increase in revenue, accounted for most of the variance.

After adjusting for the organizational costs incurred in the first quarter associated with the launch of our four new mutual funds, G&A increased by 2.2 million. This increase is primarily attributable to the recognition of a full quarter's rent for our new corporate headquarters at 280 Park Avenue -- we took possession of the space in March -- the recognition of additional organizational costs for the four funds launched last quarter, (indiscernible) advisory expenses paid to Houlihan Rovers, and the recognition of sub-placement and other fees related to investment banking transactions consummated during the quarter.

Finally, our distribution and service fee expense line reflects an upfront distribution cost associated with the recent launch of one of our closed-end funds. In addition, we continued to experience a higher proportion of C shares entering their second year when they become fee-paying.

Now turning to the balance sheet, our financial condition continued to strengthen as we surpassed the 150 million in stockholders equity. Our gross cash and cash equivalents totaled 27 million, in line with the first quarter, and our marketable investments totaled 90 million, a 6% increase from last quarter.

Let me briefly discuss some events that will be occurring over the second half of the year that will have an impact on our numbers. First, let's discuss our effective tax rate. As mentioned earlier, we recorded a $0.02 per share charge related to a recent New York State tax law change. This change, which introduces a three-year phased in decrease in the New York State apportionment factor, had an initial adverse tax effect resulting from an adjustment to our net deferred tax asset. You will recall we recorded a deferred tax asset attributable to a benefit derived from vested restricted stock units granted at the time of our initial public offering. We expect the benefit from the lower (indiscernible) factor going forward, and combined with a higher level of investment income, we project a 41% effective tax rate for the remainder of 2005.

As we continue to expand our product offerings we will be selectively adding to our infrastructure. As a result, we project compensation to be slightly higher in the second half of the year before starting to normalize. And finally, I would like to remind you about the move of our corporate headquarters to 280 Park Avenue. The move, which is scheduled for mid-November of this year, will result in an approximate $0.03 per share nonrecurring charge in the fourth quarter.

Now let me turn it back to Bob to wrap up.

Thank, Matt. As you can tell there's a lot going on here, a lot of exciting opportunities that we're following up on. Why don't we at this point stop and open it up to questions. You have Marty Cohen, myself, Joe Harvey and Matt Stadler here to answer your questions.

(OPERATOR INSTRUCTIONS). Cynthia Mayer, Merrill Lynch.

I'm just wondering if you could maybe put your planned staff increase in perspective, perhaps in terms of percentage increase of existing staff, say, over the next six months?

What we have experienced so far, and like we said it's mostly towards the end of the quarter, but when you look at March quarter to June we're up about 16%. That's on a headcount basis right. And we're thinking that the additional might be somewhere between, say, 15% in the second half.

How is the pipeline looking for investment banking?

This is Marty. As usual, it is hard to predict. The second quarter was an exceptional quarter for them. A lot of things came together to make it happen. They're always working on upwards of a dozen deals, and it's highly uncertain as to when they close. So I can't give you any guidance there.

Lastly, how is the pipeline looking for closed-ends?

I don't know; you tell us. We have some opportunities we're following up on. But as you know, we can't be specific regarding any particular quarter because it's all subject to market conditions. But there's one or two interesting ideas that we have gotten some favorable feedback on. So as always, we plan to be opportunistic.

Douglas Sipkin, Wachovia Securities.

Just a couple of questions. One, just in reference to the compensation guidance. You are talking about actual compensation expense or the compensation ratio in the second half of the year?

The percentages that I gave were more in the vein of a headcount.

But you had mentioned that comp expense would be higher in the second half of the year. I guess you are referring to the absolute number I guess as opposed to a pure compensation over revenues type of number.

I would say probably you would see let's say around a 10% uptick in the ratio for the second half of the year, and then we expect it to start to normalize in '06.

So if I'm looking at the first-half ratio, basically 10% increase on that in the second half. That's probably what you guys are guiding, right?

That's assuming revenues are the same.

Fair enough. In reference to flows, obviously I can understand sort of the dynamic with very great performance of REITs and some of your other products. What are you sort of seeing or thinking from a flow standpoint ex closed-end funds in the second half of the year? Obviously, just looking at the staple REIT index, it's had an unbelievable run. So given sort of the marginally positive flows in the quarter, what should we be thinking in the second half of the year, or is that really completely a wild card?

If I can just comment that we really don't feel comfortable projecting flows, because as you know it's all subject to market conditions and market psychology. What I can tell you is that we are working across the board, retail and institutional, to do a better job at the things that we can control. So in other words, the bulk of the answer to your question is going to be influenced by the stock market, the REIT market and the various other markets we're in and the psychology there. And who knows what that is going to look like in the next six or 12 months. But we fully expect to improve our performance in whatever the market is in terms of getting a greater share of inflows, mitigating the rebalancing phenomenon, etcetera. So we're really focused on the stuff that we can impact rather than broader market trends.

Are there any sort of capacity issues you might be facing on some of the larger open-end funds? I've got to imagine a couple of them are above 2 billion or so now in asset size.

This is Joe Harvey. We don't have any capacity issues with respect to any of our portfolio strategies at this point.

That is helpful. Just a final question on expenses. I'm sort of just trying to dice it up here. Obviously, you guys have experienced some rapid growth. And there's a certain (indiscernible) element of new investment expense that has to happen. If we could think about that from a conceptual standpoint, stripping that out, it still on the margin looks like expenses are coming in a little bit higher than initially. Is that just -- is just the regulatory/legal/compliance environment a little bit worse than you expected from an operational cost standpoint? How should we be thinking about that? And also in conjunction with that, you guys I think had mentioned that there was a closed distribution fee for this quarter for a future product. Because I don't recall any closed-end launches this quarter, so I'm just wondering what that was all about as well.

That fee was for a fund that we launched late in the first quarter. It was a fee that was paid out early this quarter.

I thought it was in the first quarter that you took that expense.

When I went through my comments here, I said that we had some additional expenses that fell into this quarter related to those funds.

I see. Related to that fund. Okay, very good. If you could address that question about sort of the expense environment.

I think the expense environment for us relates primarily to our rapid growth and to our building out of investment teams and providing the support in all areas of the firm -- investment administration, legal -- to accommodate the growth in a number of funds. So I think that's the most important driver. Of course, all asset managers, ourselves included, have had to increase our legal team for the regulatory environment. But in the whole scheme of things, that is a less important factor driving our expenses. And as you look at our numbers this year, we are carrying the costs for two headquarters. That will dissipate over time, but those factors relate primarily to the dramatic growth in our business overall.

Finally, if you could sort of refresh my memory. Obviously, you guys have a 50% ownership of Houlihan. Obviously, it's been incredibly successful. Is there an opportunity for you guys to increase that investment near-term? I guess that's not a part of the agreed-upon initial venture you have with them.

We have the right to increase our ownership in about -- starting in about 3, 3.5 years. So that is the agreement we have.

Daniel Goldberg, Bear Stearns.

It's Andrew Lee substituting for Daniel. Just a couple of brief questions. Looking at pretax margins, it looks like it appreciated substantially from the first quarter. How should we think about that metric for the remainder of the second half?

I think as what Bob had indicated, it's difficult to project the flows. And quite honestly we're not in a position right now -- it's difficult to predict banking, too. I think the focus should really be on the uptick that we described in our G&A because of the $0.03 charge in the fourth quarter, and the slight uptick in the ratio assuming that the revenues stay the same. So using the second quarter as a proxy. And assets are where they are, which is in record highs. I guess you just factor in those items. And as far as margins go, I think the expenses are going to uptick a little bit. So if you strip that noise out, the margins should be pretty much reasonable, the same.

By our estimations, its quarterly margins -- pretax margins are roughly around 40%. Would you consider that in the outlier in maybe the 36% range? It seems like that would be a more normalized number. Would you say that is a good run rate?

It's been a long-term goal of ours to have that 40% margin. That's kind of a good -- we think that is a good metric for our business. There's a lot of movement. And I think what we're all saying here is there's a lot of movement here between our increase in headcount, our recent increase in assets. This is somewhat of a transitional year (multiple speakers) for banking in the second quarter. So there's a lot of moving parts here; it's very hard for us to predict. If we can eventually maintain a 40% margin, I think that's great (inaudible)

I would add to that that we pride ourselves on being opportunistic. And a lot of the incremental costs we have incurred -- some of that is regulatory, but a lot of it, we expect a return on that investment, whether it's adding portfolio managers, expanding our distribution and sales capability. And so there could be quarterly fluctuations if we see a great opportunity to capitalize on an opportunity, whether it is launching a fund or whatever it may be, we won't hesitate to execute on that if we think it fits within our long-term strategy.

That is helpful. In terms of realization rate, it looks like it has ticked up a bit from Q1. Is that mostly due to the better performance on the closed-end side?

It primarily relates to the new funds that we've been opening, primarily on the open-end fund side, where our realization rate was 79 basis points. Those funds are higher-fee funds.

One last housekeeping. What was the total asset on the balance sheet for the end of the period?

Give you an exact number. 179 million.

Greg Mason, AG Edwards.

Taking a look at the strong growth in Houlihan Rovers, I was just wondering if you could give us a little color on where that came from. Was it flows from U.S. clients or international clients, or primarily just performance-related issues there?

It wasn't flows not from U.S. but from international clients. In particular, a primary driver was a fund that (indiscernible) sub-advised for Prudential Securities, which is -- Prudential Investments, which is distributed in Asia.

Can you give what the flows were in that Prudential fund, generally?

I don't think we can give you that number.

We would prefer not to isolate specific client accounts and their size.

And on the new dividend vale fund that you're going to be launching, with Mr. Helm's products, are these primarily going to be a retail product until you get a longer track record? Or can you take these products to the institutional channel based on Mr. Helm's past record?

That's an excellent question. We expect to achieve initial success in the retail channel where his track record is transferable; it comes with him and it's a 5-star record. And we think that will transfer nicely into the retail market. As your question implies, it might take somewhat longer to have an impact on the institutional market. And that is one of the reasons why we have Steve Dunn here, and Steve is going to be staffing up aggressively, particularly in the consultant relations Arena. So, yes, we expect to have an impact, first in retail, and then in institutional. But we're going to be -- we are going to be promoting Rick in the institutional arena right away as well.

One last kind of note. The gains on sale of securities the last two quarters; can you give us some information on what that relates to? And then I know inherently this is a lumpy line item, but is there something in your business that would kind of make this continue going forward in terms of a positive impact?

We see it having a positive (indiscernible) that is the same for the -- we have a lot of -- a good number of investments in a number of our funds that we feel we would rather have the capital invested in the business. Therefore, we may realize some gains, but it will not be substantially different from what you have seen in the past couple of quarters.

Let me clarify a point on Houlihan Rovers. They have also seen flows from our funds that we sponsor here in the U.S, our closed-end fund that we did in March of this year and an open-end fund that we started in March as well. Their (indiscernible) includes the portion they sub-advised for us. And we note in the press release that that included 330 million as of the midyear. And I note that our open-end fund has been the strongest opening that we have ever had for a new open-end fund. The international real estate investing story is one that resonates very well, and we think is going to accelerate not only with individual investors but institutions.

(OPERATOR INSTRUCTIONS). At this time there appear to be no further questions. I would now like to turn the floor back to management for any further comments.

Thank you all for joining us this morning and we look forward to speaking to you during and at the end of the next quarter. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's teleconference.