Cohen & Steers Inc (CNS) 2006 Q1 法說會逐字稿

Welcome to the Cohen & Steers first quarter and 2006 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions). I would now like to turn the call over to Mr. Salvatore Rappa, Senior Vice President and Associate General Counsel. Sir, please go ahead.

Thank you. Welcome to the Cohen & Steers first-quarter 2006 earnings conference call. Joining me 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 Marty, I would 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 factors section of our 2005 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 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 communications 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 we issued yesterday. With that, I'll turn the call over to Marty.

Thank you, Sal, and thank you all for listening this morning.

First, for the bottom-line results, last night we reported earnings per share of $0.22 for the first quarter of 2006; that compares to $0.18 per share in the first quarter of 2005. As usual, there are a number of factors that went into these numbers, which I and shortly Matt Stadler, our CFO, will discuss with you.

What I would like to focus on are what we believe are our two major accomplishments in this past quarter. First is the success of our asset management business. Asset managers are typically judged by their funds' flows. I'm pleased to report that we had 452 million of net inflows in the quarter, which came from both institutional and retail channels. Of particular note, we think we have turned the corner in the retail channel, the result of enhanced marketing and increased personnel plus the introduction of our international realty portfolio offerings that have become very, very popular.

Most of our mutual fund flows have been into our international realty fund. That fund's assets now stand at about 625 million after only one year of operation. It's been an outstanding introduction for us.

Also, most of our institutional clients either have or are contemplating allocations to our international portfolios and that certainly has helped our institutional net flows. The reallocation of assets in both of these channels into international is very, very important to us. We discussed in the past how with REITs having done so well for so many years, a lot of clients have either relocated capital in those portfolios, other asset classes or just eliminated that completely. What we're finding is with the international offering, it has offered our clients a way to reallocate the assets in a very efficient manner and that is what we are benefiting from today. So I cannot overestimate the importance of our international efforts. And as a result, we have enjoyed record assets under management at the end of the quarter at 23 billion and record revenues as well.

Of course, as a firm, always focus on strong investment performance and that performance has helped attract new assets and further increase our assets through appreciation.

Finally, we continue to build out our global platform, adding to our investment personnel around the world and registering new funds, most recently in Australia, Europe and in the United States. These new offerings all offer international or global real estate portfolios.

The second accomplishment is the major transaction which took place immediately following the end of the first quarter. We entered into an agreement with Merrill Lynch to terminate ongoing compensation agreements that relate to the offerings of several of our closed-end funds that have been offered in the past. We call these payments trailers or trailing payments; they are made quarterly based on gross assets of the funds and these payments would have to have been made for upwards of the next 25 years.

We paid Merrill Lynch 72 million in cash in consideration for this termination and this deal affords us several very important benefits. First, we will enjoy between $0.12 and $0.14 per share of accretion annually by virtue of not having to make these ongoing payments. It is rare that a company can make one transaction that has such a high percentage of earnings accretion that will be ongoing for many, many, many years.

Second, it's very tax effective. The payment was fully deductible in the second quarter, current quarter, and we will take charge of 72 million. As a result, we will enjoy an overall tax benefit for 2006 and in fact, this has already had a positive impact on our first quarter.

When we raised capital in our initial public offering about a year and a half ago, we were most often asked why we went public and what would we do with the proceeds of that offering. We think this transaction answers both of those questions. Clearly, the ability to make such a large payment was made possible with the capital that we raised. In fact, the entire payment was made using our cash resources and without the need to raise either debt or equity. We are also pleased to say that we not only deployed this capital but we deployed it at a very, very high rate of return.

Our overall results in the first quarter were somewhat negatively affected by our investment banking segment, which showed a net loss in the quarter. As we have encouraged you in the past and we will in the future, bear in mind this is a business that is highly unpredictable and subject to irregular results. We also ask you to bear in mind that it is a good profit contributor to Cohen & Steers on an annual basis so it's a good business for us.

We think the first quarter provides an excellent snapshot of our asset management business. We encourage you to use this quarter as a base. We expect investors to measure our success as a firm based on this segment's results primarily. So watch our flows, our asset growth and our revenues and profits in the asset management business.

With that, I'd like to turn the call over to Matt Stadler, our Chief Financial Officer, who will review our results in some greater detail.

Thanks, Marty. Good morning, everyone. We reported earnings of $0.22 per share; this compares with $0.18 per share in the prior year's quarter. You will recall that the prior year's quarter included a $0.03 per share after-tax expense associated with the launch of four mutual funds.

We recorded revenue of 37.8 million, representing an increase of 11% from the prior year's quarter and our net income was 8.7 million, up 23.4% from last year's first quarter.

Led by strong market conditions, coupled with our third consecutive quarter of overall positive flows, assets under management reached 23 billion at March 31, setting yet another record for the firm. Our overall annualized organic growth rate was approximately 9%. We continued broadening our product offerings. REIT common stocks now comprise less than 69% of total assets and international securities, which we started managing during 2005, now comprise almost 6% of total assets, up from 4% at year end. Now, I will review the performance of our two business segments.

First, our core asset management business, we recorded record quarterly revenue of 37.5 million, up 19.5% from the prior year's quarter and up 5.8% from the fourth quarter of 2005. Pretax income for this segment was 14.5 million, up 26.4% from the prior year's quarter and up 4.4% sequentially. Asset management pretax margin for the quarter was 40.5%. Now let's review the changes in assets under management. Assets under management in our closed-end funds totaled a record 10.3 billion at March 31, an increase of 588 million or 6.1% from the fourth quarter. This increase was attributable to 534 million of market appreciation and 54 million resulting from the issuance of preferred shares for the purpose of maintaining the target leverage ratio on our REIT and utility income fund. Our open-end funds had record assets under management of 6.6 billion at March 31, up 986 million from the fourth quarter; market appreciation of 767 million; and net inflows of 219 million, led by 266 million of net inflows into our international realty fund, accounted for the increase. Subscriptions for the quarter totaled 719 million, our highest level ever and our annualized organic growth rate for the quarter was 15.7%, the highest quarter since we became a public company. Having increased over 36% from last year, open-end mutual funds now comprise almost 29% of our total assets under management.

Assets under management in our institutional separate accounts also reached a record 6.1 billion at March 31, an increase of 898 million or 17.2% from the fourth quarter. This increase was comprised of market appreciation of 719 million and net inflows of 179 million. The annualized organic growth rate for institutional separate accounts in the quarter was 13.7%, the second highest quarter since we became a public company. Having increased 60% from last year, institutional separate accounts now comprise almost 27% of our total assets under management.

Our strategic investment in Houlihan Rovers continued to contribute as their assets under management increased 29.3% to a record 2 billion at March 31 compared with 1.6 billion at December 31 and up 156.3% from 796 million at March 31 last year.

Net income for the quarter was 696,000 compared with 478,000 sequentially. As you know, we report 50% of Houlihan Rovers' net income. In our investment banking segment, we recorded quarterly revenue of 705,000, down 68% from the 2.2 million last quarter and down 75.6% from 2.9 million in the comparable 2005 period. These significant variations once again highlight the fact that our investment banking revenue is very unpredictable. The banking segment recorded a 917,000 pretax loss for the quarter.

Moving briefly to expenses, although expenses are up slightly on a sequential basis, there are variances in employee comp, G&A and depreciation and amortization that merit some discussion. On our last call, we mentioned that the fourth quarter's results included a $0.03 per share charge resulting from the relocation of our corporate headquarters. This charge was reflected in both G&A and depreciation and account for the majority of the variance in those respective categories.

We also mentioned on our last call that the fourth quarter reflected an adjustment to our year-end compensation to incorporate a higher stock-based component. This adjustment was made in order to further employee ownership and be more aligned with other public financial services and asset management companies. The effort was led by our two Co-CEO's, Marty Cohen and Bob Steers, who each received 100% of their annual bonus in the form of restricted stock units. This adjustment to our year-end compensation accounts for the majority of the sequential variance in compensation expense.

Let me briefly discuss a few items that will have an impact on our second-quarter results. The most significant of which is the announcement we made on April 10 to terminate additional compensation agreements that were entered into in connection with the launching of seven of our closed-end mutual funds. The payment totaled 72 million and will be recorded as a onetime expense in the second quarter. We expect the termination of these agreements to result in annualized after-tax earnings of approximately $0.12 to $0.14 share. The accretion will commence on April 1st and after adjusting for the 72 million onetime expense, you will see a reduction to the distribution and service expense line relative to the first quarter.

The next item I would like to discuss is our effective tax rate. We will receive a current tax deduction in 2006 for the 72 million trailer payment. This deduction will create a net operating loss, which will be applied to periods in which we expect to have lower tax rates. This combined with an adjustment to our net deferred tax asset, results in an expected 37% effective tax rate for the year. Consistent with accounting guidance, we have applied this tax rate in the first quarter, which increased our earnings per share by approximately a penny and will apply it to all interim periods for 2006. We expect to have a more normalized effective tax rate in 2007.

Finally, we have recorded a compensation to revenue ratio of 28% in the first quarter and expect to maintain this ratio throughout the year.

Now turning to the balance sheet. Stockholders' equity reached 171 million and our cash, cash equivalents and marketable investments totaled 117 million. We mentioned that the 72 million trailer payment was made out of working capital. After giving effect to this payment, our cash, cash equivalents and marketable securities approximate 45 million and our stockholders' equity approximates 126 million. These levels, combined with the cash we generate throughout the year from our operations, are more than adequate to meet our needs and we remain debt free.

This has been quite an active quarter. Let me briefly summarize the highlights before turning it back to Marty. Assets under management reached a record 23 billion, including record levels for closed-end funds, open-end funds and separate accounts. Closed-end funds now comprise less than 45% of total AUM. Annualized organic growth rates for the entire firm was about 9% and open-end funds and institutional separate accounts were 15.7% and 13.7%, respectively. International securities now comprise almost 6% of total assets, up from 4% at year-end. Asset management's pretax profit margin was 40.5% for the quarter and finally, the $72 million trailer payment, which will add annualized after-tax earnings of approximately $0.12 to $0.14 and will commence accretion on April 1st. With that, I'd like to turn it back to Marty for closing comments.

Thank you, Matt. I think you've summarized our quarter very well and I think at this point we would be very happy to answer any questions you have.

(Operator Instructions). Andrew Lee, Bear Stearns.

Good morning. Given the overall effective restraint in industry wide investment banking in your numbers, can you give us a sense, I know your numbers can be lumpy quarter over quarter. Is there anything else that's going on in the numbers that you can talk about that speaks to the weakness?

Not really, just to reiterate what we have been saying that when transactions are closed and revenues are booked, it is highly unpredictable. As you point out, the environment is for investment banking and advisory work is favorable and our pipeline is active but there is just -- it's impossible for us to predict when transactions will close.

Also can you give us a sense of the recent events in the UK in terms of the introduction of REITs into their finance bill?. Perhaps what the impact could be on your business and that of Houlihan Rovers going forward.

Sure, this is Joe Harvey. The UK has been studying REIT legislation for about two years now. Several weeks ago, they announced a proposal that we think will be very positive for UK REIT legislation generally and for securitization around the world as well. The day that the UK treasury announced what the REIT legislation would look like, the stocks responded extremely favorably; they're up 10 to 12% in a day. So it is our belief that the existing public companies in the UK will begin converting to the REIT structure in early 2007.

Subsequent to that, we have also seen a number of companies which own real estate as a part of their operations, talk about potentially creating REITs. So, this could lead to growth in the universe that we invest in, in the UK and more broadly, we think it will help other countries like Germany proceed down the path to adopting the REIT structure. So the bottom line is it validates our investment thesis on the securitization of REITs globally; it could drive a greater universe for us to invest in; and along with that, we expect that investors not just here in the U.S. but globally will continue to make allocations to international global portfolios.

On the institutional side, it seems like organic growth has been pretty strong the last quarter or so. Can you just comment on what's that's happening there in terms of is there more like rebalancing that is occurring there in terms of the amount of more focus on real estate investments? Perhaps just under allocation in real estate investments by institutions. Can you give us your thoughts on that?

This is Marty. As I mentioned, the rebalancing has now turned more in our favor because we have an outlet for that rebalancing to take place. We're also seeing new mandates, however, and we continue to have a very strong pipeline of RFP's and no telling when and how many we win, but we're seeing more interest on the institutional side in the international than ever before, maybe even more than domestic.

And then just a final question. On your end of period assets under management, can you just provide what the breakdown is by security type, in terms of real estate and utility?

Essentially, and my points -- we're up slightly under 69% on U.S. common stock REITs and we are about 6% in international and then the rest is allocated out amongst preferreds, utilities, but those are the biggest ones.

(Operator Instructions). Cynthia Mayer, Merrill Lynch.

A couple of questions on the overseas REITs. As you manage more overseas REIT and real estate assets, I'm wondering how closely you think those are correlated to U.S. REITs? I think in the past you have said they are actually fairly well correlated but I'm not sure if you have any thoughts on that?

The correlations are about 0.5. So there are diversification benefits to adding international REITs in real estate securities to a U.S. portfolio. If you drill down a little bit further and look at cross correlations between specific countries, the correlations go even lower than that. So like with U.S. REITs providing diversification benefits to a broad mixed asset portfolio of stocks and bonds, we think that international real estate securities does a similar thing but to a lesser extent than REITs would generally.

Okay, great. If the growth of your international assets continues at this pace, will you have to add more people overseas by the end of the year?

The answer is yes and particularly in the investment research area. We will staff up to cover the growth in the universe of companies that's occurring by way of IPO's and by way of existing companies, converting to the REITs structure or existing companies not in the real estate business spinning off the real estate assets.

But when you say you plan to keep the comp to revenues ratio where it is now, does that include the assumed hiring of more people for international?

Yes, that's factored in.

Okay. And in terms of G&A costs, any thoughts there? It seemed like last year was sort of a year of some kind of elevated G&A costs as you grew the business and do you expect them to sort of growth in line at this point?

I think the G&A, as you point out, Cynthia, there were some things in the G&A in '05 like the relocation charge and the fund launch costs that introduces some volatility in there. I think where we are at now, at or around 5.5 million is a decent proxy. The one thing to bear in mind is that we do pay sub-advisory and similar fees to Houlihan Rovers and that amount is included in our G&A and so as Houlihan Rovers contributes more, there will be a proportionate increase in G&A relative to the equity pickup. But otherwise, the run rate that you see now, about 5.5 million, would be a good one to use.

Okay, great. Last question is can you talk a little bit about how you see ETFs and REITs interacting? Do you see, when you look ahead, a greater share of the domestic REIT investment going to ETFs and how do you see that playing out with international REITs?

There are a couple of ETFs that are about to be introduced in the international arena. Frankly and this is my opinion, I'm not sure that that's going to be an efficient way to invest because it is so -- it's such a diverse group of companies, countries, currencies, we really believe -- and this is not because we are this -- we believe that active management should way outperform ETFs. We have seen the ones that are out there or the underlying structure of them and it doesn't bother us.

Okay, so you think the flows will track the performance and people will pretty clearly see that the [active] management is winning and put the flows there?

Cynthia, it's Bob. Right now, there is a mismatch in terms of -- there is very few firms that have either infrastructure or track record in global or international real estate securities investing. And the investor appetite as an opportunity to invest in this important asset class has never existed before so the appetite is quite large. And the infrastructure such as ETFs is immature or doesn't even exist. So for the foreseeable future, it is not unlike the REIT industry in the early '90s, where the investor demand is starting to grow rapidly and the number of quality choices out there is extremely limited. And as Marty pointed out, even as there are more choices such as ETFs, many of them are going to be flawed and even on the active side; to the extent there's more competitors, it's generally not their primary business.

Okay, great. I guess just one more question. Do you have any remaining trailers left at this point that you could buy back or is that pretty much it?

There are some. It's relatively small. If you look at our distribution and service fee expense line item, that's not going to go away because you have to remember we have an open-end fund business and there are expenses related to that, but we do have a small number of closed-end fund trailers remaining.

Michael Carrier, UBS.

Just a quick clarification. On the $0.12 to $0.14 annual accretion, does that include both a decrease on the distribution expense and the tax benefit? Meaning is that a net number?

Yes, it does and it also factors in usage of cash because there will be obviously less interest income. Right, so it factors all three of those things in, correct.

Okay. And then just on the open-end flows, it looks like the international, like the strength has been great. Just in terms of U.S. flows and that product, it seems like the industry had inflows based on just the flows that you guys note on the international fund, it seems like the rest of the funds had modest outflows. Just wondering if you're seeing any change in that or what the outlook is?

We actually had modest inflows on the domestic REIT side. We had a number of large institutional accounts transfer from our institutional fund to separate accounts, which gives the impression of an outflow on the open end -- on the U.S. REIT side and it's not the case.

Actually the performance is -- of the U.S. REIT market up substantially in the first quarter and continuing with tremendous strength, has started to attract more. Plus our domestic funds have very high ratings in the Morningstar and other systems. We are seeing inflows into the domestic funds from a host of investors.

(Operator Instructions). Douglas Sipkin, Wachovia Securities.

Good morning, everyone. Just a couple of my questions have already been answered just a couple of additional. So I guess you guided the tax rate -- run rate for about 37% for 2006 and you mentioned '07 would be more normalized, more normalized being in the low 40 range I guess for '07?

Yes, 40%.

Okay. And then secondly, obviously, you guys have gone through a pretty tremendous investment phase here, building out the international piece of the story and obviously the demand is there. Is there any sort of pre-tax operating margin that we can think about, maybe not so much in the very near-term, given that you guys are still at least in a little bit of an investment mode, but going forward something that maybe we could be thinking towards? Or is it this sort of level is something you guys think is sustainable for the foreseeable future and then even after there?

I don't think there is a margin we want to guide to. And one factor you have to keep in mind is the purchase of the trailers is going to affect the margins in the Company, which is unrelated to the operations generally speaking. I think that beginning in the second quarter, the trailer purchase will be reflected and you'll have a better sense of it after that.

We don't have a real corporate target of a pre-tax margin or an operating margin and we just continue to invest in the business and grow the assets.

I guess what I'm trying to -- want to gauge is, it has been an unbelievable run for real estate and REITs in particular and now the global story is starting to work for you guys. And I guess I'm a little surprised we haven't seen a little bit more drop to the bottom line. And so I was just trying to gauge, is that a function of just that you guys are such a big investment or it's sort of the normalized level of business given just higher costs for the whole industry I guess.

Well I think, you're looking at a point in time here and the international fund is a great example, where in 12 months, the flows are well over $600 million. So what we are doing here is we have charted a core strategically. We're executing on it. Frankly, the results are even better than we expected and the momentum is significant. So my guess is without making any predictions, if trends continue that your question will be a moot point. We are deploying assets and generating very high returns on those assets and ultimately they should drop to the bottom line.

And then just finally, obviously, the international piece of your growth plan is really developing. Anything new to add? I know you guys also were targeting diversifying a way from real estate. I know you hired a value team a while back. Any color or update on new developments on that end of your growth spectrum?

We continue to dedicate resources to building that business. We always knew that it was going to be a slow build but performance has been good. The team is in place. We are getting assets flowing into it but frankly, the flows into the international fund have just dominated that picture for us. We expect over the next couple of years that that might shift and we expect it to shift with greater acceptance of our non-REIT strategies.

One thing to also factor in hopefully in a favorable way is that we're not simply expanding, just expanding our international investment capabilities. We're also expanding our international distribution. So we hope and expect over the coming year to be bringing on meaningful assets from non-U.S. sources. And so that together with hopefully increasing momentum in asset flows to our dividend growth team will provide additional diversification in our revenues.

Okay, and then just thank you for helping me in providing the color on the cash in marketable investments, pre and post. My sense is that you guys -- and I think you have indicated this before -- have gone through a pretty big investment phase. Using the 72 million right now to sort of pay down the trailers and create the value going forward, is that sort of, should we read into that maybe that there's less to be done on the investment side in the next couple of quarters and that's why you guys opportunistically did it now?

No, we did it now because you know if you were on our IPO road show, we said buying back trailers were one of a number of potential uses of proceeds and the transaction happened now only because this was the first time there was both a willing buyer and a willing seller.

At this time, there appear to be no further questions. I would like to turn the floor back to management for any closing comments.

Thank you all for joining us today and we look forward to speaking with you next quarter. Thank you.

Thank you. This concludes today's teleconference. You may now disconnect your lines and have a wonderful day.