Cohen & Steers Inc (CNS) 2006 Q3 法說會逐字稿

Welcome to the Cohen & Steers third-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) Thank you.

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 third-quarter 2006 earnings conference call. Joining me is Co-chairman and Co-Chief Executive Officer, Marty Cohen; our President, Joe Harvey; our Chief Financial Officer, Matt Stadler; and our Chief Operating Officer, Adam Derechin.

Before I turn the call over to Marty, I'd 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 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 is 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 forma or non-GAAP financial measures which we believe are meaningful in evaluating the Company's performance. For detailed disclosures on pro forma metrics and their GAAP reconciliations, you should refer to our 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 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 these 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 Marty.

Thank you, Sal. And thank you all for listening. There are five areas I'd like to cover briefly today before turning it over to Matt Stadler. The first is our earnings results.

Last night we reported earnings of $0.39 per share in the third quarter which compares to $0.20 in the third quarter of '05 nearly double on a year-over-year basis. A lot of our growth came from our investment banking segment. As we mentioned to you last call they closed on some significant M&A transactions that were a great contributor to our results this quarter.

But that wasn't the whole story as our asset management core business enjoyed a 26% increase in assets under management to $25.5 billion, and a 24% increase in revenues compared to last year. This was the result of positive flows and appreciation.

Net inflows in the quarter were $441 million entirely from our open-end mutual funds. Much of our flows were into our international Realty fund whose assets stood at $1.4 billion at the end of the quarter. That is in just about 1.5 years of existence. I should also mention that inflow since the end of the quarter have remained exceptionally strong.

We actually had additions to our separate accounts during the quarter and lost no accounts. However, as has been the case for a couple of years now, we've had some rebalancing with respect to existing clients that has resulted in a modest outflow of $5 million. This is something when you think about REITs having performed so well over the past couple of years it's something that we become accustomed to.

Nonetheless we continue to see extremely strong interest in all of our investment strategies in the institutional community and we're very pleased to have received recognition for our capabilities as last week we received the Real Asset Manager of the Year award from Institutional Investor. We believe that this success is in large part the result of our expanded retail and institutional sales and client service efforts.

The second area is investment performance which as we say around Cohen & Steers is our product. Investment performance was very strong across the board as both domestic and international REITs returned about 9% in the third quarter. Our other investment strategies I should mention all posted positive returns.

As evidence of this great performance both short term and long term, we had funds among the top performers for each of the three months, one-year, five-year and ten-year timeframes as reported by the Wall Street Journal.

The third area is our Houlihan Rovers affiliate. A major accomplishment in recent weeks was the agreement that we came to whereby we will acquire the remaining 50% interest in Houlihan Rovers, our affiliate in Brussels. Importantly, Joe Houlihan and Gary S. Rovers will be receiving Cohen & Steers stock as the majority of their consideration. It will be delivered over several years and they will become Cohen & Steers shareholders and employees.

Houlihan Rovers assets of $900 million will be added to Cohen & Steers upon closing. These assets consist primarily of institutional separate accounts and three [C-Cavs]. As you know those are non-U.S. mutual funds.

Over the past two years we have made great strides in integrating our investment process, trading and administration across all of our offices not just Houlihan Rovers but in Hong Kong and in London as well. It was logical to all of us that completing the process of acquiring the whole company would be beneficial to everybody, most particularly our clients. As one firm we can now offer the very best in performance, client service and administration. We expect the transaction to close before year end and it is of course subject to regulatory and other approvals.

The fourth area I'd like to discuss is new endeavors. During the quarter we began selling shares in our new open-end Asia-Pacific Realty fund which already attracted $52 million in only two months of operation. This is the first and only fund of its kind in the U.S. It is attracting a great deal of interest particularly from investors that are looking to participate directly in the growing Asia economies.

Second we began offering shares in our open-end institutional global Realty fund which we expect to attract institutional clients who either don't meet our separate account minimum or prefer the convenience of an open-end fund.

And third, we filed a registration statement and are currently marketing Cohen & Steers closed-end opportunity fund, itself a closed-end fund that invests in existing closed-end funds. It is the first of its kind, another pioneering Cohen & Steers effort. We'll know at the end of November how successful this offering will be.

The last area I'd like to discuss is our outlook. We were very proud to have accomplished three of the most important strategic objectives that we set out for ourselves over the past two years. Earlier this year the retirement of trailer payments; second, the agreement to acquire the rest of Houlihan Rovers; and third, the completion of our buildout of our retail and institutional sales forces. These have already had a major impact on our asset gathering abilities; the power and efficiency of our global platform and of course our earnings.

One of our most important remaining objectives is to continue the growth of our non-U.S. REIT assets under management. We have already achieved great success as this segment has declined to 65% of our total assets under management. As you probably are aware just a few years ago it was 100%.

Our incremental focus now is on the large cap value segment of our business. With our expanded resources and a continuation of our stellar performance record in this investment strategy, we're confident that we will be able to grow this business as well.

One final note which is something we are very proud of is that we also for the second year in a row achieved -- were awarded the best website in the mutual fund industry, something that we are very pleased with and we invite everybody to listen or look at our website.

So with that, I'd like to stop and give Matt Stadler the floor to give you some greater detail on the numbers.

Thanks, Marty, and good morning everyone. Yesterday we reported record earnings of $0.39 a share, a 95% increase from $0.20 a share reported in the prior year's quarter and a 39% increase from $0.28 per share reported last quarter which you will recall was adjusted for the $1.25 termination of compensation agreements and a $0.02 gain from the sale of property and equipment.

We recorded record revenue of $54 million, a 48% increase from the prior year's quarter and our net income was $15.7 million, up 97% from last year's third quarter. Led by strong market conditions coupled with our fourth consecutive quarter of overall net positive inflows, assets under management reached $22.5 billion at September 30, setting another record for the firm. We have now recorded net positive inflows in eight out of the nine quarters we have been a public company.

Our organic growth rate for the last 12 months was 11% and we continued to broaden our product offerings with U.S. REIT common stocks now comprising 65% of total assets and international securities which we started managing during 2005, now comprising almost 12% of total assets up from 2% a year ago.

Now I will review the performance of our two business segments. First, in our asset management business we recorded record quarterly revenue of $44.1 million, up 24% from the prior year's quarter and up 9% sequentially. Pretax income from this segment was $17.2 million, a 26% increase from the prior year's quarter and a 3% increase from last quarter after adjusting for the termination of the compensation agreements and the gain.

Asset management's pretax margin for the quarter was 40%. Remember when we compute our pretax margin we add back amortization of intangible assets which are attributable to the noncompete agreements.

Now let's review the changes in assets under management. Assets under management in our closed-end funds totaled a record $10.7 billion at September 30, an increase of $588 million or 6% from the second quarter. This increase was attributable to market appreciation. Our closed-end funds had record assets under management of $7.8 billion at September 30, an increase of $1 billion or 16% from the second quarter. This increase was attributable to net inflows of $446 million led by $348 million of net inflows into our international Realty fund coupled with market appreciation of $599 million.

Gross subscriptions for the quarter totaled 928 million, our highest level ever and our organic growth rate for the last 12 months for open-end funds was 16%. Assets under management in our institutional separate account business reached a record $7 billion at September 30, an increase of $589 million or 9% from the second quarter.

Net outflows of $5 million were more than offset by market appreciation of $594 million. Importantly, our expanded institutional client service and marketing teams generated enough new assets from new and existing client relationships to just about offset the rebalancing of client portfolios resulting from continued strong investment performance. We did not lose any client accounts. In fact we gained six new accounts from four new relationships and our organic growth rate for the last 12 months for institutional separate accounts was 26%.

Our strategic investment in Houlihan Rovers continued to contribute as their assets under management reached 21% to a record $3.5 billion at September 30 compared with $2.9 billion at June 30, and up 190% from $1.2 billion at September 30 last year. Net income for the quarter was $1 million compared with $720,000 sequentially and currently we report 50% to Houlihan Rovers net income.

As you know and Marty mentioned as well, we recently announced that we reached an agreement to acquire the remaining 50% of Houlihan Rovers. The transaction which will be funded through a combination of cash and restricted stock is expected to close during the fourth quarter and will be slightly accretive to earnings. Later on I will spend a few minutes discussing in more detail the impact of this transaction on our numbers.

In our investment banking segment, we recorded record quarterly revenue of $10.4 million, up from $2.1 million last quarter and up from $1.2 million in the comparable 2005 period. These significant variations once again highlight the fact that our banking revenue is very unpredictable. The banking segment recorded a record $6.2 million pretax profit for the quarter.

Moving briefly to expenses, after adjusting last quarter's distribution and service fees for the $75.7 million trailer payments mentioned earlier expenses are up 22% on a sequential basis. Employee compensation and G&A comprised most of this increase.

We mentioned on our last call that our compensation to revenue ratio for the second half of the year would increase slightly due primarily to increased headcount resulting from the expansion of our retail sales force as well as the staffing of our London office. Our ratio from the quarter increased from 28% to 29.5% which is approximately 5% higher than it was last quarter. This increase combined with 28% revenue growth accounts for the sequential variance in compensation. Remember that when we calculate this ratio we include the equity and earnings of Houlihan Rovers in revenue.

We have been mentioning on our calls that the subadvisory fee we paid to Houlihan Rovers was one of the most significant variables in G&A. Subadvisory fees paid to Houlihan Rovers during the quarter increased about 35% from the amount paid in the second quarter. This is consistent with our growth in international portfolios.

Now let me briefly discuss a few additional items that will have an impact on our fourth quarter results. The first item is our effective tax rate. On our last call we projected an effective tax rate of 33.5% and we are still on target with that rate. This lower rate is the result of a tax benefit we will be receiving in 2006 for the $75.7 million trailer payments made in the second quarter partially offset by a change in our deferred tax rate. We expect to have a more normalized effective tax rate of about 40% in 2007. With respect to compensation, we expect to maintain a 29.5% compensation to revenue ratio for the fourth quarter.

And finally, I'd like to spend a minute on our agreement to acquire the remaining 50% of Houlihan Rovers and its impact on our numbers. We expect the transaction to close during the fourth quarter. Upon closing we will consolidate the results of Houlihan Rovers operations.

The main impact of the consolidation will be to one, increase our assets under management which using September 30th as a proxy would be $900 million. Two, increase our fee income resulting from the increase in assets under management. Three, include their operating expenses. Four, reduce our G&A for the subadvisory fees. And five, eliminate the equity and earnings of affiliate caption on the face of our income statement. These changes which are prospective will be reflected when the transaction closes.

Now turning to the balance sheet, stockholders equity was $145 million and our cash, cash equivalents and marketable investments totaled $88 million, up $26.5 million from last quarter which you will recall had the $75.7 million of trailer payments paid out so the liquidity is building back as we had mentioned it would.

Let me briefly summarize the highlights from this quarter before turning it back to Marty. Assets under management reached $25.5 billion, another record for the firm and included record levels for closed-end funds, open-end funds and separate accounts. Organic growth rates for open-end funds and institutional for the last 12 months were 16% and 26% respectively. Open-end funds and institutional separate accounts now comprise 58% of our assets under management and international securities now comprise almost 12% of total assets up from 2% a year ago.

Asset management's pretax profit margin was 40% for the quarter. Our investment banking segment recorded record quarterly revenue and record quarterly pretax earnings and finally we announced that we have reached an agreement to acquire the remaining 50% of Houlihan Rovers which will be funded through a combination of cash and restricted stock.

With that let me turn it back to Marty Cohen.

Thanks, Matt, and I think we can just open this up to questions now.

(OPERATOR INSTRUCTIONS) Andrew Lee with Bear Stearns.

Good morning. Good quarter. Just wanted to talk about your positioning in the UK market with the impending adoption of the restructure over there. Just want to get a sense for your relative positioning.

Could you repeat the question? You weren't clear.

I'm sorry. Can you give us some more color on your relative positioning in the UK market -- UK real estate market with the impending adoption of the restructure?

Absolutely. First of all, our Houlihan Rovers affiliate has been the specialist in the European real estate securities asset management business for a very long time and that includes the UK market. To prepare for the growth in that investment universe and for the growth that we are seeing in global and international mandates, we've been increasing our investment staff in Europe generally. That includes opening a London office several months ago. That office is large enough to accommodate 15 people and we'll fill that up over a multiyear period.

Initially it will be a research and investment office where we will have research analysts. We will also once we receive our regulatory licensing, we will have consultant relations personnel to assist us in penetrating the institutional marketplace.

Okay, great. Just wanted to touch upon the new close-end fund and registration. What is the structuring fee or applicable trailer fee to that new fund?

Sure, in this it's the prospectus, the red herring is out and as with all closed-end funds those arrangements are disclosed in there. But we will have a maximum structuring fee payment of 1.25% relative to the assets that are raised and that will be paid out over up to an eight-year period in the amount of 15 basis points per year. This fund is a little different than our others in that it has an open ending provision. In the fifth year of the fund if it is trading at a discount to a net asset value in excess of 7.5%. So the structuring fee payment is modified relative to market convention to contemplate the open ending of that fund.

Okay, great. That is helpful. And then finally, jus wanted to talk a bit more on Houlihan Rovers. What is the revenue generation in Q3 and year-to-date and what is the profitability profile in that business?

On a year-to-date basis, on our income statement we've recorded 50% of the earnings which is $1.2 million. So you double that and that is what their earnings are. When we consolidate in though, our subadvisory fees will net down against their revenue. Suffice it to say that the deal is going to be slightly accretive to us not significant enough to model anything in. And the biggest impact you're going to see is AUM going up by the organic amount, the fee income associated with that increase. You'll see some expenses come in on the G&A line; comp is going to continue to be at 29.5% so that should be transparent; and the G&A will go down because we're going to eliminate the subadvisory fees we're paying them. So it will be sometime mid quarter we'll be reflecting that and the first quarter of '07 will be a better barometer of what we're going to look like going forward.

Okay, great. Thank you.

Douglas Sipkin with Wachovia.

Good morning everyone. Just had a couple of questions I wanted to run through just starting obviously the international Realty fund has been incredibly successful. I think you guys mentioned almost $1.5 billion in assets. Just double check, there's no real capacity issues with that fund at this point, I mean there is still plenty of room?

No, Doug, the non-U.S. real estate securities market is actually bigger than the one in the U.S. So there are no limitations here.

Okay, terrific. Obviously it looks like the sales efforts are starting to kick in. Can you give us some color on the size of both the retail and institutional sales force and if you have any plans to -- are you still in expansion mode for the sales force?

On the retail side we now have 12 external and call it 12 internal wholesalers. And that is pretty much the maximum that we are targeting because it covers every region of the country and every distributor that we do the most business with. For as a company our size that is the optimal.

On the institutional side, we have 14 individuals that are institutional including debt consultant relations, client service and marketing. And the likelihood is we're going to add a couple of people over the next year there. As our client relationships grow and actually as they become more complex, since we're managing money around the world now and we're managing money for some non-U.S. clients, the client service requirements are growing and we are very, very conscious of maintaining not good but great relations with all our clients.

Can you touch a little bit on -- I know it's lumpy on the investment banking outlook. I know you guys had a terrific quarter, on of your best maybe not your best ever. Just any color on any potential business that you guys might be seeing next quarter into early '07 or is that too much of a stretch?

It's a little bit of a stretch. When we've seen something that we know is going to happen we've always been very candid about that on these calls. We'd rather not -- they always have a pipeline of deals as every investment banking business does. I want to say the same thing today as I did in the first quarter when I mentioned it, just as we asked in the first quarter to look at our asset management business as the core and judge us on that and that was a quarter that investment banking didn't do well. I've got to say the same thing in this quarter where investment banking did exceptionally well but really judge our growth potential, our core business being the asset management business.

I'll ask it anyway but you pretty just -- it's not an area where you think you can pick up some opportunity by adding people given your expertise in that asset class? Even though once in a while it can help the quarters?

That may happen and we as a firm are always looking for talented people. As I've also said in the past, this is a business that makes money for us. That's the business that we're in and if someone were to come who would be able to develop a business or bring in people that could enhance our profitability, we'd certainly entertain that.

Okay. Moving along to the closed-end fund market obviously it was a big source of your growth a couple of years prior. Now with the interest rate environment getting a little bit more favorable how would you categorize the closed-end fund market right now compared to maybe 1.5 years or so ago? Are we close to a point where potentially it is going to get a lot easier to bring new product or is it still too early to tell.

I think it's a little early to tell. We're launching this closed-end fund now which invests in other closed-end funds because there are some pretty significant discounts in the marketplace that we think we can take advantage of in this particular vehicle. The raises that had been out there in the closed-end fund world have been primarily over the past few months have been primarily very specialized niche type of products like the one that we are offering. I think it's going to take a little more closing of the discounts and perhaps an even more benign interest rate environment for that window to open. And maybe it does happen in '07 but and if it does it is something that we are leaders in and we intend to take advantage of.

Just a point of clarification on my end. You mentioned that Houlihan had $3.5 billion in AUM. But when they are consolidating you're only adding 900, can you help me understand that?

Yes, if you look on our release and where we have our AUM figures and the reason why we have subadvisory expense is that we are -- we have arrangements with Houlihan Rovers subadvisory and other for them to manage portions of the portfolio. So we are counting that as our AUM and we are disclosing it that it's basically being some portion -- the portion that's being managed by Houlihan Rovers. When we have in our press release that they were at a record, you would take their AUM less the disclosure that we have on our press release which is a footnote to indicate the amount of our assets that they are managing and that incremental or $900 million represent their own organic assets which is what we would consolidate into our business.

Okay, terrific. That is very helpful. Just quickly on the first comment, you had mentioned that the flow trends that you guys are seeing particularly in the institutional appear to have carried through towards the end of the quarter and possibly in the early part of October?

Yes, that is correct.

Okay, terrific. Thanks a lot.

Cynthia Mayer with Merrill Lynch.

Good morning. Just as a follow-up to that last discussion of consolidating Houlihan. Can you explain how the flows will be consolidated and what their net flows have been? Do you show any of their flows right now?

No, no. We don't consolidate them in so their flows have been -- not as impactful as ours. I mean when we first made this investment they had $500 million of their own assets and they've grown that now to $900 million over a two-year period -- let's say through a combination of net flows and appreciation. So I don't think consolidating them in will have an impact, a meaningful impact on our organic growth rates.

So it's sounds like they have positive flows but pretty light?

Yes, they've had positive flows and they've had appreciation that based on a $500 million number was impactful; based on a $25.5 billion number you'll see it but it won't be that significant to us.

I'd like to add Cynthia that as we've now become one firm and we have more consultant relations and more people in continental Europe and in the UK we expect to or we're hopeful to have some better marketing success. Also Houlihan Rovers has three C-Cavs, and these are of coarse funds that can be marketed throughout the world except in the United States and we also want to put an effort behind getting assets for that. Nothing to report but I just want you to see what the potential opportunities are in this combination.

Right. On the rebalancing I apologize if you mentioned this because I got to the call late. But is there any seasonality to that? Would you expect people to reevaluate say in the first quarter?

The seasonality is when they meet and they say Rover allocated to REIT. Let me add just a little bit of color on that. We have a number of clients that are in the $500 million to upwards of $1 billion in assets with us. When they become 10% over allocated in REITs you can see that is $50 million or more that they reduce from their accounts in order to reallocate to others. So those are the kinds -- those have a lot of impact on us in absolute numbers.

We take that as part of what we do and that is pretty much it. Think about the outflows we had of $635 million. And that was not loss of a client in nine months, that was really rebalancing. Let me say one thing further on that, these clients because of break points are paying a very low fee on those assets that are above the hundreds of millions. So losing the assets is not as -- has not -- doesn't have as big an effect because it is at such a lower fee. And when you see our fee realization rates go up that is a small but still a part of what you'll see.

Right and the international fund has higher fees, right?

Correct.

Even among REIT funds?

Even among REIT funds and other separate accounts as well.

Right. Just to doublecheck you don't get any performance fees do you because it has been such a phenomenal year for performance?

No.

No performance fees.

Did I hear someone say not yet?

No, no, no.

No performance fees.

You are not offering them now in your accounts are you?

No, we are not.

You are not, okay. I think that is it. Thanks a lot.

Mike Carrier with UBS.

Just a few questions. First on the Houlihan Rovers, I think we can get the net income like you were saying, Matt, just from the income statement on equity and earnings and affiliate. But just so we don't boost the revenues too high can we kind of look at the operating margin similar to yours? In terms of if you work back to get the revenues around 40%?

Yes, I would say it is probably close to that. There is going to be -- look at it more from '07 going forward than when it initially consolidates in. But it is kind of similar so I would model that in, yes.

Okay. And then just the comp rate for 29.5 for next quarter and then once you get to '07, are you still in that 28% or so range?

You know, I think I would probably keep it with a 29 handle on it. The main reason why we are there is because of the expanded sales force in the London office and as Joe mentioned over 12 or 18 months it's got the capability of growing to 10 or 15 people. I think that is probably where we are going to settle in for the foreseeable future.

Okay. And then just on the institutional side, the flows year-to-date have been great. I guess the rebalancing is a high class problem; markets are doing that well and your performance is. If we kind of look going over the next year or so, are you still thinking that you can have organic growth in that double-digit range given the backlog that you see?

This is Joe. That is a number we really can't predict. Right now the environment is very favorable as Marty mentioned. The international and global funds are popular and there is a lot of institutional activity when you look at RFPs and active searches. But to try to predict an organic growth rate is very difficult because obviously it's going to change as the market conditions change.

Okay. And then just finally. You guys had a shelf registration and I understand providing liquidity for some of the shareholders and then there was an additional I think $4.5 million. I'm just wondering like for corporate purposes or strategically what would be your top priorities just more on the international front if something came along or is it just to have?

You know we don't have a specific purpose in mind that we could talk about today. As you can see I think where we're very pleased is that we've raised $100 million on our initial offering and the question was what are you going to do with it? Over two years we've basically spent most of that. We've also ceded funds and incubated strategies that have paid off for us. We've got good gains in those. We always recycle that and you see that in our investment income category. So we earn a very high return on our capital and if we were to raise capital in the form of primary shares, it would be to have that capital available to take advantage of further opportunities.

Okay, thanks a lot.

Marc Irizarry of Goldman Sachs.

Thanks. It looks like you guys have made a pretty big investment on the institutional separate account side and were able to maybe stem some of the outflows this quarter from the rebalancing. But the inflows did decelerate and I'm just curious how do you reconcile the deceleration in inflows in the institutional side of the business versus the investments that you make there? And also as a follow-on to that, can you talk a little bit about the -- are you winning more business these days relative to the number of RFPs you are seeing or generally just more a search activity in general? Thanks.

We are very pleased with the results we are seeing from our institutional team. Keep in mind that the institutional sales cycle is long. At least one year if not more. And especially with respect to the global and international area where we have been educating many potential investors over the past 18 months. But we are very pleased with the impact that the institutional team is having with the consultant community. We have been winning more accounts and we are optimistic about the return on investment with that group and in fact we're going to continue to add some consultant relations people over the next year.

Okay, thanks.

[Aaron Codell] with [Whole Capital].

Good morning. Just a follow-up to the earlier question about investment banking. You've talked a lot about the revenue volatility but I just wanted to -- you talk a lot about your strategy and everything that is going on in asset management. But in terms of the strategy for investment banking, what is their niche and then how do they manage the what I would imagine would be potential conflicts with the asset management side just as shareholders of businesses that they may be doing investment banking work for?

The primary business interestingly has been in the healthcare area where there are specialists in things like assisted living and nursing homes and the like. And that was a source of their biggest revenue contribution in the third quarter. They do do some investment banking for an advisory work for real estate companies just like any other firm. We have a Chinese wall and we are very -- we adhere to whatever requirements there are to separate the two. I as a Co-CEO, I do not know what they are doing but we have legal and finance people that do monitor that. I know it when it goes on the restricted list.

We have a restricted list of anything -- doing business with any real estate company that we might have as a candidate or do already own. So far and they've been part of our company for now about eight years, we have never had a conflict that we have never had a conflict with their activities with respect to our asset management business and something we intend to maintain that.

Okay. And this is a minor question but the gain on sale of marketable securities was a little bit higher than it has been in the past few quarters. Is there a run rate for that line or how do you arrive at that number?

What we do is we've got a pool of capital that we set aside strictly for incubating and ceding funds and strategies. As you can imagine with the performance of all of our strategies doing so well, that pool grew to a point where we wanted to reduce the absent size of the pool and that anything that we would sell would generate profits so that is really the result of that.

Okay, thanks very much.

(OPERATOR INSTRUCTIONS) [Marshall Pinix], a private investor.

Thank you. As I understand it on your income statement, the distribution and service fee expenses which has jumped all around was $81 million in the June quarter and $5.6 million in the September quarter.

Excuse me, could you speak a little louder. We can't hear you.

Yes. I'm referring to the distribution and service fee expenses on your income statement, the $81 million in the June quarter and the $5.6 million in the September quarter. Now I understand they are synonymous with the trailer payments as you've been discussing, is that correct?

Yes, that is correct.

Okay. Now I was looking on the balance sheet in the preceding quarter end to see what you had shown if anything as a liability or a reserve and I'm assuming that these accrued compensation numbers on your balance sheet, those are the reserves for these payments. Is that correct?

No, we funded these and paid them in cash and in my prepared remarks, I was describing how our cash and cash equivalents has grown from the last quarter and that the second quarter it was reduced to make the $75 million of payments. So there was no accrued liability on the balance sheet. The payment was wired out of our cash and cash equivalent position.

Okay. But since -- now I understand the basis for all of that is that on the closed-end funds you paid the underwriters 2.5% of the IPO value at the closing and then over time you have to pay them another 2.5% but you have the option of not paying any more than 1/10 of 1% per quarter. Now with all that in the picture, shouldn't there be some reserving for those payments?

No. For our own closed-end funds, the additional compensation or trailer payments were paid out over on an annual basis and the length of those were in the 15- to 20-year range. In the second quarter of this year, we agreed to terminate those payments in an exchange for a onetime payment. And that is what made the distribution of service fee expense line item on our profit and loss statement increase substantially. That was a onetime transaction.

On the balance sheet the accruals that you see relate to employee compensation. They don't relate to the distribution arrangements for our funds. There are no balance sheet accruals except in the ordinary course of the cycle during a quarter.

But what is left under those agreements with the underwriters? What is the total amount of that 2.5% that still has not been paid?

I don't know what that 2.5% you are referring to.

I got this talking to the company to Mr. Rappa recently and the information I got was that when the underwriters -- when this IPO for the closed-end funds --

Sir, can I make a suggestion?

Yes.

Matt Stadler's number is on the press release. Maybe call him and speak to him privately because I think it might be more germane (multiple speakers) more direct attention.

I did do that about a couple of weeks ago but I didn't get a call back. But I will try again.

Okay, good. Thank you.

Thank you. I'm showing no further questions at this time. I would like to hand the floor back to our speakers for closing remarks.

Thank you all very much for joining us on this call and we look forward to speaking with you next quarter. Thank you all.

Thank you. This concludes today's Cohen & Steers conference call. You may now disconnect.