Cohen & Steers Inc (CNS) 2006 Q2 法說會逐字稿

Welcome to the Cohen & Steers second-quarter 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. Please go ahead, sir.

Thank you and welcome to the Cohen & Steers second quarter of 2006 earnings conference call. Joining me today are co-Chairmen and Chief Executive Officers Martin Cohen and Robert Steers; our President Joseph Harvey, and our Chief Financial officer Matt Stadler.

Before I turn the call over to Bob, 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 Cohen & Steers.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 outcome 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 2005 Form 10-K. I want to remind you that the Company assumes no duty to update any forward-looking statements.

Also, the presentation we make today will contain pro or non-GAAP financial measures, which we believe are meaningful in evaluating the Company's performance. For detailed disclosures on performance metrics and their cap reconciliations, you should refer to the financial data contained within our press release, which as previously mentioned is posted on our website at CohenandSteers.com.

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 had 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, and good morning, everyone. I would like to start out by briefly discussing the headline numbers, which hopefully you have seen by now, and then I am going to highlight some significant accomplishments during the quarter. Matt will then expand on the headline numbers, and I will close our formal remarks by outlining our goals for the balance of the year.

As I suspect most of you have already seen, for the second quarter, we reported a loss of $0.95 per share. That included a charge of $1.25 per share related to the prepayment of additional compensation agreements with Merrill Lynch and UBS, along with a $0.02 gain from the sale of property and equipment. After adjusting for these items, earnings were $0.28 a share.

In addition to the headline earnings per share numbers, we were very very pleased with a number of important trends and developments in the quarter relating to both our asset management and investment banking groups. And I would like to spend a few minutes just to highlight and review some of these developments for you.

First and more most importantly, our investment performance remained very strong with our U.S. total return international and global REIT portfolios reach portfolios all performing well above their respective benchmarks.

Secondly, we have announced plans to further expand our global investment team with the addition of Leonard Geiger, who will open our London office this quarter and lead our European real estate securities research team. Leonard is a really traffic addition for us. He brings over 14 years of investment and real estate securities experience to our team, and we are very pleased to have Leonard joining us.

Also, in the quarter, we largely completed the very substantial expansion of both our U.S. retail and institutional sales and marketing teams that we have been speaking with you about for the last few quarters. Although they will need some time to really hit their stride, we are already seeing some very encouraging results.

Assets under management reached a record 23.2 billion in the quarter, despite 254 million of market depreciation. Both our retail and institutional channels contributed to deliver 536 million of net flows, which equates to about a 9% organic growth rate for the quarter. And that number would, of course, be higher if we were to exclude our closed-end funds.

While most of the quarter's flows went into international and global strategies, we also achieved several notable strategic breakthroughs during the quarter. First, we were selected to manage the U.S. and Asian portions of a global real estate securities fund offered by the Scottish Widows Investment Partnership, which is offered to retail and institutional investors throughout Europe.

We were also selected to manage part of a global mandate to be marketed to institutional investors by Mitsubishi in Japan. Both of these relationships will bolster our brand and distribution outside the United States.

Importantly, we also landed our first preferred stock separate account mandate of $50 million, and we expect to achieve much more as we showcase our non-REIT strategies to institutional investors via our expanded institutional marketing and sales team.

Our European securities assets under management by our affiliate Houlihan Rovers increased to 2.9 billion from 2 billion in March, and the activity level there remains very strong. And although we are still experiencing the REIT rebalancing phenomenon, we are recapturing a significant portion of these funds with our international strategies, and we expect this to continue.

Not surprisingly, the mix shift resulting from these new flows and the rebalancing into non U.S. portfolios has caused our effective fee rate based on end of quarter assets to increase to 61 basis points from 58 basis point at the end of March, and we are optimistic that these trends will continue.

On the new product front, in response to strong market demand, we will soon be launching two new funds -- Cohen & Steers Asia Pacific Realty Shares and Cohen & Steers Institutional Global Realty Shares. We're very optimistic that these funds will achieve critical mass in the near future.

Last but definitely least, we have said in the past that the results of our investment banking group are inherently lumpy and unpredictable. With this in mind, we're pleased to report that in addition to the 2.1 million in revenues reported in the second quarter, we have already booked about 9 million in fees this month alone, which ensures that this will be our investment banking group's best quarter ever.

These results reflect the high-level of M&A activity in the real estate and health-care industry and our very strong market presence in this sector.

At this point, I'm going to stop and turn the call over to Matt to provide further details on the quarter.

Thanks, Bob. Good morning, everyone. Yesterday we reported a net loss of $0.95 per share compared with $0.21 per share in the prior year's quarter. The 2006 quarter includes $1.25 per share after-tax expense associated with our prepayments of certain closed-end mutual fund trailers and a $0.02 per share after-tax gain from the sale of property and equipment.

After adjusting for these items, earnings per share were $0.28. The 2005 quarter includes a tax expense of $0.02 per share, resulting from a change in the New York state tax law and after adjusting for this item, earnings per share in the second quarter of 2005 were $0.23.

We recorded record revenue of 42.1 million, representing an increase of 10.1% from the prior year's quarter. Despite overall market depreciation, assets under management set yet another record for the firm, reaching 23.2 billion. This was led by 221 million of net inflows into our open-end funds where we reported our fourth consecutive quarter of positive inflows and 315 million of net inflows into our institutional separate accounts where we recorded our third consecutive quarter of positive inflows.

Our annualized organic growth rate for the quarter was 9.3%. We continued broadening our product mix. U.S. REIT common stocks now comprise 66% of total assets, and internationals securities, which we started managing during 2005, now comprise over 9% of total assets, up 4% from December 31, which is more than double.

Now I will review the performance of our two business segments. First, in our core asset management business, we reported record clearly revenue of 40.4 million, up 22.4% from the prior year's quarter and up 7.6% from the first quarter of 2006. Pre-tax loss for this segment was 58 million compared with pre-tax income of 12.9 million in the prior year's quarter. The 2006 period includes the previously mentioned trailer expense of 75.7 million and the 1.1 million gain from the sale of property and equipment. After adjusting for these items, pre-tax income was 16.6 million, a 28.7% increase from the prior year's quarter.

Asset management's adjusted pre-tax margin for the quarter was 42.8%. Please remember that when we compute our pre-tax margin, we had back amortization on the non-competed brands.

Now let's review the changes in assets under management. Assets under management in our closed-end funds totaled 10.1 billion at June 30, a decrease of 164 million or 1.6% from the first quarter. This decrease was attributable to market depreciation. Our open-end funds had record assets under management of 6.7 billion at June 30, up 163 million from the first quarter. The increase was attributable to net inflows of 221 million led by 326 million of net inflows into our International Realty Fund, partially offset by market depreciation of 58 million.

Gross subscriptions for the quarter totaled 702 million, our second highest level ever, and our annualized organic growth rate for the quarter was 13.4%. Assets under management in our institutional sector separate counts reached a record 6.4 billion at June 30, an increase of 283 million or 4.6% from the first quarter. This increase was comprised of net inflows of 315 million, partially offset by market depreciation of 32 million. The annualized organic growth rate for institutional separate counts in the quarter was 20.6%, the highest quarter since we became a public company. Our strategic investment in Houlihan Rovers continued to contribute as their assets under management increased 42.2% to a record 2.9 billion at June 30 compared with 2 billion at March 31 and up 156.6% from 1.1 billion at June 30 last year.

Net income for the quarter was 720,000 compared with 696,000 sequentially. As you know, we report 50% of Houlihan Rovers' net income.

In our investment banking segment, we recorded quarterly revenue of 2.1 million, up from 705,000 last quarter, but down from 5.5 million in the comparable 2005. These significant variations once again highlights the fact that our investment banking revenue is very unpredictable. The banking segment reported a 239,000 pre-tax profit for the quarter.

As Bob mentioned, investment banking participated in three merger and acquisition and capital raising transactions totaling approximately 7.5 billion in market value. These transactions are expected to generate approximately 10 million in fees, 9 million of which have already been reported in the third quarter, a record for the banking segment.

Moving briefly to expenses, after adjusting distribution and service fees to the 75.7 million trailer payments discussed earlier, expenses are up slightly on a sequential basis. There are, however, variances in employee compensation, distribution and service fees, and G&A that merit some discussion.

Taking distribution and service fees first, had we not prepaid the trailers, which was effective April 1, our distribution expense for the quarter would have been approximately 3.1 million higher. In our last call, we mentioned that the sub-advisory fee we pay to Houlihan Rovers was one of the most significant variables in G&A. Sub-advisory fees paid to Houlihan Rovers during the quarter totaled approximately 1.2 million, almost double the amount paid in the first quarter. This is consistent with Houlihan Rovers' continued growth.

We also mentioned on our last call that our compensation to revenue ratio for the second quarter would stay at about 28%. Therefore, the approximate 13% increase in compensation is line with the growth in revenue. You'll remember that when we calculate this ratio, we include the equity and earnings of Houlihan Rovers in revenue.

Let me briefly discuss a couple of items that will have an impact on our second-half results. The first item is our effective tax rate. On our last call, we discussed that we will receive a current tax deduction in 2006 for the trailer payments. This deduction will create a net operating loss, which we applied to periods in which we expect to have lower tax rates. As a result of this loss and consistent with accounting guidance, we projected an expected 37% effective tax rate for the year. Based on updated projections, our expected annual effective tax rate has been revised to 33.5%. The effect of this revision has been reflected in this quarter's provision. We expect to have a more normalized effective tax rate in 2007.

The other item is with respect compensation. As Bob mentioned, we completed the expansion of our retail and institutional sales forces during the quarter, and as you know, it usually takes a few quarters before the newly hired wholesalers generate meaningful flows. This coupled with the staffing of our London office will result in some compression in the compensation to revenue ratio. Therefore, we expect the ratio to increase slightly for the second half of the year.

Now turning to the balance sheet, stockholders equity was 131 million, and our cash, cash equivalents and marketable investments totaled 61.5 million. Please bear in mind that these balances reflect the 75.7 million trailer payments made during the quarter. We believe these levels combined with the cash we generate throughout the year from operations are more than adequate to meet our current operating needs, and we continue to be debt free.

This has been quite an active quarter. Let me briefly summarize the highlights before turning it back to Bob. Assets under management reached 23.2 billion, yet another record for the firm, and included record levels of open-end funds and separate accounts. Annualized organic growth rates for open-end funds and institutional separate accounts for the quarter were 13.4 and 20.6%, respectively. International securities now comprise over 9% of total assets, up from 4% at year end, more than doubled. And asset management's adjusted pre-tax profit margin was 42.8% for the quarter.

With that, let me turn it back to Bob Steers.

Thanks, Matt. To finish up, I would just like to summarize our goals for the balance of the year. Obviously we were pleased with the trends this quarter, but we still have a lot to do.

First, we will continue to focus on achieving or maintaining our top tier performance across all of our strategies. And while that may sound like an obvious goal, I want to point out that it is our view that there are a combination of factors today, including the growing importance and convergence of retail and institutional gatekeepers in an environment with an oversupply of traditional investment products, which means that superior performance is essential for sustainable growth. And even good distribution will no longer be able to compensate for inferior returns. So our focus on achieving and maintaining superior results across all of our strategies is as intense as it has ever been.

Second, we want to focus on opening the London office and finishing up the expansion and integration of our European staff. This will include adding analysts, some institutional consultant relations people in London, and of course, weaving our new investment professionals into the existing investment process.

Third, we want to maintain and improve our organic flows by improving the productivity of our wholesaling group, as Matt alluded to, and by adding more distribution partners and platforms both here and abroad such as the several European and Japanese new relationships we spoke about earlier.

And lastly, our corporate goal remains focused on increasing our non U.S. REIT assets as a percent of our total assets under management, which as Matt mentioned is currently about 34% and growing.

So with that, I will stop and open the floor to questions.

(OPERATOR INSTRUCTIONS). Cynthia Mayer, Merrill Lynch.

I'm wondering whether you track anything like a win rate in terms of finals? It seems like you're getting good flows. Have you had enough so that you feel like you can generalize on that?

I'm sorry, a win rate on institutional?

On institutional, yes.

We do track it, but frankly it is not as simple as one ratio. I think it would vary depending on strategy, U.S. REITs or some of our newer mandates, that sort of thing. But I would say certainly in international and global mandates, without putting a number on it because I don't have one in front of me, but we have a pretty high success ratio there since we were one of the first movers, and though there are many companies that say they are in the business, we believe we really only have two or three strong competitors right now.

The U.S. REIT market is certainly more competitive, so the ratio would be lower there. But it is still pretty good. We have a couple of institutional funds.

One of our rationales for starting our global institutional fund is that we have a lot of small institutions that are investors with us through these funds, and we expect to see a lot of activity from those smaller institutions as we have seen in our domestic institutional REIT funds.

I guess I should back up and just -- I mean, the flows seem very good on international global -- and ask how many -- do you feel as though a lot more firms are going to get into this area, and I know you feel in general that you are at the beginning of a real hockey stick in terms of the potential, but how do you -- when you look around at the competitors, how do you see that progressing?

Well, as I said, there are a lot of financial service firms that have, as they have begun to notice the secular trends that got us excited years ago, have thrown their hat in the ring. And I have been told there are somewhere between 15 and 20 firms that claim to have global and international real estate securities experience.

So unlike the U.S. REIT cycle, which began in the early '90s and we were one of the few believers and it evolved very slowly, the -- there is a scramble -- a global scramble to get in this business. So being a first mover, having an established track record and organization is a huge leg up. However, we are going to be competing against global financial institutions that might have greater marketing clout.

One other byproduct of this, which we can't control and does affect us to some extent, is it is bidding up a price of talent of investment professionals that have experience in this field outside the United States in Europe and Asia.

Can you also just let us know how many people you think you'll wind up having in London when everybody is integrated there?

The office lease that we're negotiating would provide a space for about 15 people. So we will have plenty of room for growth. But initially it's a research office, and it will be staffed with three people in the research department.

Mike Carrier, UPS.

Just two questions. First on the flows, as Cynthia said, international is great. But when you look at the 536 million in net flows, can you give any other color just on the products, mainly U.S. real estate, utilities, preferred to the value fund?

I think in my points we alluded to the fact that in the open-end funds we are up on the net flows, but we are up more on the international. So we have been seeing and Bob mentioned about this continued balancing phenomenon. REITS have had a great run. People are rebalancing. Six months ago, this rebalancing would have caused us to have flat flows or slightly down. We have been able to keep more of the money here because they are rebalancing it into international.

So, I think to your point we are seeing some pressure a little bit on the domestic because there's profit-taking. But that pressure is alleviated through these other products that we have to offer internationally.

I would add that we had positive flows to our dividend value and preferred strategies during the quarter. Albeit relative to our total business, they were not at a level -- they're not at the level that we are targeting. We have instructed both our retail and institutional sales and marketing teams to make those two strategies their primary strategic focus for the balance of the year. So while we certainly can't know where the flows from the value, preferred and other strategies might be, for the balance of the year, they are going to be our main focus. So it will be interesting to see whether those flows pick up relative to international.

And then just on the financial side, as cash continues to build, how many other -- or maybe magnitude wise, how big are the other distribution-related trailer fees with the other underwriters?

They are pretty negligible. We have some periodic conversations, but anything that would be done their would not be meaningful.

And then when you say the tax rate reverts back to a normalized level, are you kind of targeting a 40%, but would you have any benefit from the opening the international office?

Absolutely. And I think if you normalized it at 40, that's right. But as international becomes more -- becomes bigger, as Joe pointed out, we're building in capacity. There is going to be revenue generation out there. So it's just going to also have an offshoot benefit of helping us to reduce that a little bit. But I think if you 40, it would be directionally right.

[Mark Arazari], Goldman Sachs.

My first question actually on just the current trends and flows and performance, can you provide maybe a little bit of color as to what you're seeing so far in this quarter?

This is Marty. I'd say we are seeing a continuation of what we saw in the second quarter. Essentially continued flows in international and flat to modest in flows actually in domestic.

Great. You know you made some comments where the fee realization rate is heading. Can you maybe put a little more meat on the bone there in terms of where you think the growth in the global will head and kind of magnitude if you count it all in terms of the fee differential between global and domestic?

It is a journey. When you look at December versus now, we are more than double, although it's greater than 9%, it's 9%. When you go into those areans, the fee rates are higher. So, as Bob mentioned, going from 4% to 9% and having a higher wage is having a pretty good uptick on our effective fee rate and Marty is indicating that flows are sustaining themselves throughout the second or the third quarter. So we will expect over time that our international percentage gets higher, which will have a positive effect on our fees, and we would expect that our effected fee rates would continue to go up.

And then just in terms of leveraging some of your investment on the wholesale headcount side of things, when would you expect to start to see the flow-through on the topline for some of those investments?

I think you'll start seeing it modestly starting in the fourth quarter. I would expect us to really be hitting our stride in calendar '07. But directionally you should see a steady uptick.

(OPERATOR INSTRUCTIONS). [Aaron Cadell], [Holtz Capital].

A couple of things. First, on the gain on marketable securities, would that be net of any cash distribution that you had during the quarter? With less free cash posted to distribution service fee payment, I am assuming you just have less cash currently to do the things that you do to degenerate those gains, invest in your funds and stuff like that. How can we think about that line going forward?

Are you talking about our cash generation?

Just the line that is gain from sale of marketable securities. I'm just trying to understand whether that gets impacted at all going forward by the reduced cash that you currently have on the balance sheet -- [MULTIPLE SPEAKERS].

No, that is the gain that I think we said in a previous call -- in the ordinary course of business, we cede our funds as we will be doing with these two new Asia-Pacific and institutional funds. After a period of time, we put programs into place where we start to liquidate those investments when the funds reach scale. So we are constantly incubating funds and looking to take advantage of opportunities that are out there, which is deploying some level of our cash. Unfortunately for us, there is appreciation there as we provide to our investors. So through our program, we periodically realize those gains when they are no longer needed to be in the funds.

The impact of having less cash because we purchased the trailer payments would be shown in the interest and dividend income line. As you can see from the first quarter to the second quarter, it went down because we invested that cash.

And would you -- assuming, say, interest rates stay the same and the investment performance remains the same, is the interest and dividend income at a good run-rate, or just given the changes in cash, would that be affected?

We would expect that to build. We project our cash going out constantly, and I have an analysis in front of me right now. But our cash cash is going to build, and as our cash builds, we will be able to achieve greater interest and dividend income in future quarters.

The trailer payment was made at the beginning of quarter. So the lower rate of interest income is reflected for the full quarter, and as Matt said, as our cash builds back up, you should see that interest rates being equal, should begin to grow again.

And then one more and then I have one more broader question, but on the investment banking revenues, the margin on the investment banking business will bounce all around. But is there a comp ratio? I mean, others in the investment banks might use, say, a 50% comp ratio on those revenues. Is that something we can apply to the revenues that you are projecting for the third quarter?

That's good question. We compensate our banking team commensurate with the marketplace, but we manage our overall compensation to a firm-wide comp and benefits ratio. For the first half of the year, it has been 28%, and we had indicated that for the second half of the year due to the reasons we mentioned, it's going to go up slightly.

So to your question, the banking quarter that we're going to have in the third quarter, the compensation to the team will be handled out of our overall firm ratio. So it's not going to be dramatic uptick in comps since we are magic managing to a ratio that is going to stay static.

And then last but not least, I just wanted to get your thoughts from a REIT investor perspective on just the incredible interest that private equity firms seem to be having in the space. It has obviously benefited some of your investments, but do you think this is something that -- does it feel a little bit kind of frothy to you? I mean, private money comes in and out of the real estate sector. Is this a secular trend that you would expect to continue for sometime going forward?

Just to frame the question a little bit, over the past 18 months, there's been $50 billion of REIT privatization transactions, and the average premium to the last sale price for those stocks was about 12%. So you're right -- there's been a lot of activity by the real estate advisory firms and by some private equity shops.

It's our view that this will continue. There's five or six deals that are being rumored right now, and it's going to continue until something significant changes. And, as I think about it, the things that would change is that stock prices go up more to the point where those deals can't be done, or liquidity seizes up or fundamentals turn down significantly. So we will expect to see more of that activity over the balance of the year.

[Michael Clipper], [Clipper Advisor Services].

I certainly remember when the investment banking earnings were a significant part of the total company. But I'm wondering, looking to the future, assuming that the earnings and the asset management business continue to grow, would there be a time that the investment banking business would no longer be meaningful to you and could get in your way?

I don't really see how it could get in our way. It is a separate division that year in and year out is very profitable. So there's no reason to tinker with that. The steady growth clearly will come from asset management, but the profitability of this division is something that we enjoy at this Company. So there's no reason to change that system.

We always warn that quarter quarter it is hard to tell. We have seen good and bad quarters as we've seen this year. But year to year they are good contributors to our profits, and that's why we are in business, to earn.

(OPERATOR INSTRUCTIONS). There appear to be no question at this time. I would like to turn the floor back over to Salvatore Rappa for any closing remarks.

Well, thank you all very much for joining us today, and we will see you all next quarter. Thank you.

Thank you. This does conclude today's Cohen & Steers conference call. You may disconnect your lines at this time and have a wonderful day.