Cohen & Steers Inc (CNS) 2007 Q2 法說會逐字稿

Welcome to the Cohen & Steers second-quarter 2007 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. If you would like to pose a question during this time, (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 second-quarter 2007 earnings conference call. Joining me are Co-Chairmen and Co-Chief Executive Officers Marty Cohen and Bob Steers; our President, Joe Harvey; and our Chief Financial Officer, Matt Stadler.

Before I turn the call over to Marty, I would like to make the following remarks. Yesterday we issued a press release announcing our second-quarter 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 and year-to-date.

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 sections of our 2006 Form 10-K, which is also available on our website.

I want to remind you the Company assumes no duty to update any forward-looking statements. Also, the presentation we may today may 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 the financial data contained within the press release we issued yesterday.

Finally, this presentation may contain information with respect to investment performance of certain of our funds. I want to remind you (that past performance is not a guarantee of future performance. This presentation will also contain information about certain funds that have filed registration statements with the SEC which have not yet become effective. This communication shall not constitute an offer to sell or the solicitation of any offer to buy these securities. For more complete information about the funds we will discuss today, including charges, expenses and risks, please call 1-800-330-7348 for a prospectus and see the press release we issued yesterday.

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

Thank you, Sal, and thank you all for listening this morning. First, let me get down to the most important numbers. Last night we reported earnings per share for the second quarter of $0.44. That compares to a loss in the year-ago quarter, but after backing out some other items, some items that we've discussed previously, the payment for the acquisition of trailers and a gain on sale, last year second quarter earnings were $0.28 per share. So the $0.44 is versus $0.28 on an equal basis and that makes the year-over-year increase 57%.

Our revenue was also very strong -- $69 million in the quarter versus $42 million a year ago; a 64.8% year-over-year increase. And our assets under management ended the quarter at $34.6 million; that compares to $23.2 billion a year ago. That's a 48% increase year-over-year. Very importantly, our assets under management grew by 3% in this quarter alone, and I'll talk about why that's very important to us in about a minute.

Let me discuss some of the noteworthy developments in the quarter. The increase in our assets under management were due to significant retail and institutional flows into our international and global accounts. But our flows also included a $540 million large cap value mandate, which is a very large, for us, increment to those assets that we manage in the non-REIT area. What this does for us is it give us critical mass in this category and enables us to compete for much larger mandates in the future. There are several already that we are candidates for.

As many of you know, US REITs seem to have gone out of favor in the last several months. They were down 9% in the second quarter, 12% today year-to-date and 22% from their peak in February. This is the worst performance for US REITs since 1998 and it has presented a very challenging environment. However, US REITs are now down to 46% of our assets under management (technical difficulty) much less reliant and of course much less vulnerable to one asset class.

We are continuing to significantly diversify our asset base. We have new hedging capabilities that we brought on this quarter that give us a foothold into the alternative space. We brought on a gentleman named Yigal Jhirad, who is a 21 year veteran of Morgan Stanley. He has assembled a team to enable us to employ a host of new investment strategies. In short, we don't have to be just a long-only manager.

Our first capital raise in this strategy is happening in the month of July and it's a covered call fund that will be pricing tonight. It's the Cohen & Steers Global Income Builder, symbol INB, and we expect it to be around (technical difficulty) [500 million] in size. Now, let me just give you the caveat to that. It is not closed. The pricing will take place tonight. It is not yet effective with the SEC but we do want to give you a flavor for exactly what -- or estimate what the size might be to give you a sense of what that's going to be. This fund will also (technical difficulty) [deploy] leverage of about 20%.

Investment banking was not a major contributor to our earnings per share in the second quarter, after of course, an extremely strong and record first quarter. We think that the investment banking division is shaping up to have a better third-quarter as there's still a strong pipeline of deals. And some of the deals that our bankers have been working on will be reaching fruition in the next several months. Again, we cannot estimate what the magnitude of these fees will be but we know that it will be a decent quarter.

As we have said repeatedly, please judge our progress by our results in asset management. When we look at asset management, our revenue of 66.5 million is up 65% from a year ago. Our pretax income, again, after adjusting for the trailer acquisition of last year was 29.6 million, a 76% increase. The results that we have had -- over the last 12 months we've had 8 billion in net inflows. This is an organic growth rate of about 34%.

Our goal as a firm for many years has been to have a strong presence in every channel -- retail institutional, open and closed end, load/no-load, domestic/international. It is very clear to us that this strategy is paying off. As an example, in the first quarter we had record retail flows, although we still had a strong $469 million net flow into retail in the second quarter. In the second quarter, however, our institutional flows at $2.6 million were a record and a major contributor to the increase in our assets under management. It's too early to tell what will drive the third quarter but we are very happy to have a very respectable raise at hand in our closed end fund.

And finally, we are continuing to build our international presence, not just as investors but from a business standpoint. And in the quarter we named Steve Kenneally, a very experienced gentleman in Asia to be the CEO of our Hong Kong office.

We have challenges going forward as every investor does and every investment management company does. Interestingly, our challenges with respect to building the organization are certainly not complete but largely behind us. We think probably the biggest challenge is the severe market turbulence that we have had over the past month or two. And clearly domestic refunds are generating net outflows and the performance has not been good. And it's difficult to tell how that will change over the next couple of months.

We can talk about the REIT market if anyone wishes to, but let me summarize where we are in the REIT market today. We had a peak in February. As I mentioned, we're down about 22% from that peak. REITs today are trading at probably their strongest valuations in many years and their earnings and their prospect for earnings growth is as strong as ever. So, we're confident that there will be a turn in this marketplace; we just can't say when or from what level. But clearly that is a challenge for our Company.

With that, I'd like to turn it over to Matt Stadler, our CFO, and he'll go over some of the more specific numbers.

Thanks, Marty. Good morning, everyone. Yesterday we reported earnings of $0.44 per share compared with a net loss of $0.95 per share in the prior year's quarter. The 2006 quarter included $1.25 per share after-tax expense associated with the termination of certain fund compensation agreements 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 for the 2006 quarter.

We reported revenue for the quarter of $69.3 million compared with $42.1 million in the prior year's quarter and $76.8 million sequentially. The first quarter included our highest quarter of banking fees ever. Net income for the quarter was $18.6 million compared with a net loss of $37.8 million in the prior year's quarter and net income of $22.3 million sequentially. The 2006 quarter included the trailer payments and the gain on sale from property and equipment, and the sequential quarter included record banking fees.

Despite overall market depreciation, our assets under management reached a record $34.6 billion. This was led by record 2.6 billion of net inflows into our institutional separate accounts and 469 million of net inflows into our open end mutual funds. We have now recorded net inflows in 11 out of the 12 quarters we have been a public company. Our overall organic growth rate for the last 12 months was 34%.

We continue to broaden our product offerings with non-US REIT common stocks now comprising 54% of total assets, up from 34% last year. This includes international securities which now comprise 30% of total assets, up from 9% a year ago.

Now I will review the performance of our two business segments. In our asset management business, we recorded record quarterly revenue of 66.4 million, up 64% from the prior year's quarter and up 9% sequentially. Pretax income for the quarter was $29.6 million compared with the pretax loss of $58 million in the prior year's quarter and pretax income of 26.8 million sequentially. Again, the 2006 quarter included the trailer payments and the gain from the sale of property and equipment. After adjusting for these items, asset management's pretax income in the 2006 quarter was $16.6 million.

Asset management's pretax margin for the quarter was 46%. Please remember that when we compute our pretax margin we add back amortization of intangible assets which are primarily attributable to the non-compete agreements.

Now let's review the changes in assets under management. Assets under management in our closed end mutual funds totaled 11.2 billion at June 30, a decrease of 551 million or 5% from the first quarter. The decrease in assets under management was attributable to market depreciation. Our open-end funds had assets under management of 11.1 billion at June 30, a decrease of 361 million or 3% from the first quarter. The decrease in assets under management was attributable to market depreciation partially offset by net inflows of 469 million led by 761 million of net inflows into our international realty fund. Our international realty fund now has over 4.3 billion in assets since its launch in March of 2005.

Gross subscriptions for the quarter totaled 1.6 billion, our second highest level ever. Our organic growth rate for the last 12 months for open end funds was 50%. Assets under management in our institutional separate accounts reached a record 12.3 billion at June 30, an increase of 1.9 billion or 19% from the first quarter. The increase was comprised of record net inflows of 2.6 billion, primarily into large cap value, global and international real estate security portfolios, partially offset by 721 million of market depreciation. Our organic growth rate for the last 12 months for institutional separate accounts was 63%.

In our investment banking segment we recorded quarterly revenue of $2.9 million, up from $2.1 million in the prior year's quarter but down from the record results we recorded in the first quarter of 2007. Our investment banking revenue remains very unpredictable.

The banking segment reported a $412,000 pretax profit for the quarter and fees generated during the quarter were primarily attributable to capital raising and merger advisory assignments.

Moving to expenses. On a sequential basis, expenses were pretty much flat, decreasing about 1% in the second quarter. Lower employee compensation was partially offset by increases in G&A and the amortization of deferred commissions. Since our compensation to revenue ratio remained at 29% for the second quarter, the decrease in compensation expense is in line with the reduction in revenue. G&A increased 12% sequentially. This increase was primarily the result of higher recruiting fees, increased rent expense associated with the lease of additional space at our corporate headquarters at 280 Park Avenue, and higher T&E resulting from our continued global expansion. Amortization of deferred commissions increased 33% from the first quarter. The increase is primarily due to higher subscriptions in our international real estate fund.

Now turning to the balance sheet, stockholders equity was 266 million and our cash, cash equivalents and marketable investments totaled $186 million, up from $165 million at March 31.

Let me briefly discuss a few items that will have an impact on our second half results. The first item is our effective tax rate. Last quarter we mentioned on the call that our effective tax rate for 2007 would be between 38 and 39%. Our rate for the first half of the year was 38% and we expect to maintain that rate throughout the second half of the year. With respect to employee compensation, we expect to maintain our compensation to revenue ratio at around 29% for the second half of the year. We expect our G&A to increase about $0.02 per share in the second half of the year resulting from the additional space we have taken at 280 Park Avenue. Although we reported record net inflows into institutional separate accounts, most of the flows occurred toward the latter part of the quarter.

And finally, as Marty mentioned, we are scheduled to price our new closed end fund offering Cohen & Steers Global Income Builder this evening. The press release will be issued tonight indicating the amount of the raise as well as other details. The advisory fees associated with this raise will be about 100 basis points. Associated costs will include net organizational expenses and structuring fees.

Now I'll turn it back to Marty.

Thank you, Matt. I think we're ready to take any questions you may have.

(OPERATOR INSTRUCTIONS) Michael Carrier, UBS.

First, just a question on I think the REIT market in general. I think -- just talking to our REIT guys here, the outlook on valuations and fundamentals are pretty good. Just wondering in credit markets in general but more specifically like the commercial mortgage-backed securitization market, obviously there's some dislocation in there along with a lot of other areas. When I talked to our internal guys they say that area is very challenging, yet the underlying real estate debt in the properties are fine. I'm just wondering what your view on that is and how that would impact either your business or the real estate markets in general?

Sure. This is Joe Harvey, let me address some of those questions. First of all, in terms of the fundamentals for real estate and REITs. Looking at the primary driver of value which is cash flow, things are still very good, and that flows from the economy and the fact that there hasn't been a tremendous amount of building of this cycle.

Some of the concerns that are affecting the REIT market today relate to asset pricing and certainly the availability of debt generally is one of the primary uncertainties today. I'd categorize it in a couple of different areas.

And let me first address the general corporate financing market which is something that's affecting everything, as many of you know there. There's a huge backlog of LBO financing sitting on the balance sheets of -- or our commitments sitting on the balance sheets of Wall Street today and that's affecting the markets generally. The fact that there's been a lot of LBO activity in the REIT market certainly is a concern and it could take away some of the bids that have been out there for REITs.

In terms of the more general day-to-day financing for real estate and for mortgage financing on traditional terms with 75% LTVs, there's still plenty availability. There are more dislocations in some of the subordinated debt markets and there's been a lot of property acquisitions that have been occurring with much more high -- much higher leverage levels. So the spreads on those higher LTV pieces of debt have certainly widened out. While the single-family market doesn't affect the companies we invest in, there's been a spreading of risk aversion over to the more risky pieces of the real estate finance market.

So all that said, the concerns are that the [devaluation] of the pricing on real estate could be affected by the lesser availability of debt financing. And considering that the valuations on real estate have increased or the multiples placed on real estate have expanded, there's a concern that we could be going the other way.

So far in the transaction markets for quality assets we have not seen that yet. For secondary assets we have seen cap rates or valuations begin to deteriorate a little bit. So what does that really mean for the REIT market? The public market has been discounting these uncertainties. Today the stocks are trading at 15% discounts to our view of their underlying real estate net asset values. So we think a large part of the correction has happened but as you know as these things go, I can't call a specific timing of this correction but we think that a lot of the uncertainties out there are fully discounted in the stock prices today.

Just on the hedging capabilities. Besides the closed end fund, any other products that either you guys have been tooling around with or is it still too early to give too much color on that?

It's a little early but we've definitely made a commitment to increase our capabilities in this area and this is our first venture into it. There will be more in the future but nothing definitive to report today.

And then just finally. Given the building level of cash on the balance sheet, the pullback in the stock price, just your kind of outlook on cash usage, whether it's more strategic uses or buybacks?

This is Bob steers. As you know, we are building cash. We have no debt and we have a wide range of opportunities available to us for the deployment of that capital, whether it's buying back stock, launching new products, considering acquisitions. I mean they're all available to us and it's really up to us to determine what is the highest and best use of that cash.

Cynthia Mayer, Merrill Lynch.

I'm wondering if you can give a sense of -- you talked a little about the US REIT market -- can you give a sense of how correlated you think the non-US REIT markets are these days and both in terms of the performance and also in terms of the flows? We've seen outflows from US REIT funds. Would you expect that to carry over into international at some point?

Cynthia, this is Marty. There has not been a very strong correlation between the US market and the non-US market for various reasons. Firstly, the non-US there's currency, there's different fundamentals and what have you. Asia is up -- still up strongly this year. The last month or so I would say there's been a stronger correlation but we suspect that's probably a temporary phenomenon. Nonetheless, where we've had net outflows from US REITs, the net inflows continue into the non-US portfolios. If this -- if international real estate companies continue to perform in line and poorly with US, that's probably going to change or it certainly could change. But so far that's not been the case.

Why do you think they've been more correlated in the last month? Do you think that's just a reflection of less financing available and less bid worldwide?

It's probably that the same credit spread widening and in some of the non -- some foreign countries have increases in interest rates. And I think the buyers in general of the property both private and public are looking at similar fundamentals. And maybe that's the reason why there's been more of correlation.

Okay, and on the separate account flows, those are really tremendous separate account flows. Can you give a sense of when those -- did those reflect wins that you had before REITs peaked? And would you expect the turbulence to carryover to the separate account flows similar to the US REIT funds?

This is an interesting phenomenon because as we have experienced over the past couple of years, the better US REIT's did, the more our institutional clients shifted either out of REITs altogether or shifted into international. We are in the midst of a number of very large candidates for very large mandates. We've done finals presentations and we have a number in the offing. And interestingly, and I [would] encouraging that the correction in the REIT market has encouraged some of the more sophisticated institutions and people who practice asset allocation not just talk about asset allocation are looking at this as a potential entry point. So I'm not discouraged about the institutional market. In fact, it's kind of encouraging that they might actually step up their interest in both US and non-US REITs.

Great. No more rebalancing problems, I guess, for the moment. Now it can go the other way. I guess last question is just in terms of the -- can you give a little more color on the separate account flows? Where those a few large ones? Were they from non-US clients? What were they for?

They were a large non-US client. What were our net new relationships? We had several net new relationships and net new accounts.

Three net new relationships; seven net new accounts.

A combination.

But there were a couple of large ones. The large GAAP value mandate was very large, over half a billion and a foreign account was probably over a billion.

Okay. Oh, and one banking question. The Emeritus deal, was that in this quarter in Q2 or will that fall into Q3?

Q2.

Q2. Thank you.

Marty mentioned earlier that the pipeline was active but the first quarter of '07 was really like an unbelievable quarter. So I think whatever activity we see, it's not going to be to that extent.

Great, thanks a lot.

(OPERATOR INSTRUCTIONS) Douglas Sipkin, Wachovia.

Just a couple of questions follow-ups. First, I don't know if you guys provide it but was looking for maybe the international client that you [wouldn't] break down, if you guys disclose?

International clients? In other words, non-US client as opposed to non-US securities?

Non-US clients, correct.

I don't have that offhand. We've not disclosed that. 7 billion of the AUM in institutional is in global and international mandates but we don't disclose really the composition of the clients. But you'll remember that when we acquired Houlihan Rovers they had $1 billion that came over. Those were all non-US clients. But in addition to that we have non-US ourselves. But we've just never disclosed that.

Okay, no problem. Interesting, it seems you're gaining a little bit of traction in the non-real estate world. Can you talk a little bit more about some of those pending mandates I guess as it relates to large cap value and your outlook there, maybe for a little bit more detail than you provided on your formal comments?

Well, there's not a whole lot more to tell. As you know, the large cap value team joined us about 2.5 years ago. They have an outstanding track record, both before and since they've joined us. The assets they manage include an open end fund that we launched about two years ago, which is slightly in excess of $100 million. They have the Harbor new relationship, a couple of smaller ones. And they will be managing a significant portion of the assets of the closed end fund that we'll be closing this evening. So, that's essentially their current sort of range of assets under management.

Based on their outstanding track record, based on the volume of RFP's that we're seeing and the momentum that they've generated and now the critical mass that they've achieved, we're quite optimistic about the growth potential for their assets under management going forward.

Okay. And then just finally, obviously, you guys have talked about the current closed end fund. I mean, I know you had a couple of other products in the pipeline. How is that all -- will that pipeline change, I mean with the markets getting weaker like they have? Obviously, interest rates have been rallying, though, so that might be a little bit of a benefit. Any viewpoint on how that might shake out? I know it's a volatile marketplace, closed end funds.

I think you answered the question yourself. It's a volatile market. It's always been a very opportunistic market. And so if the window is open and in particular if it's open to one of the probably close to a half a dozen strategies that we've either already filed for or are thinking about filing for, we'll absolutely take advantage of that. And hopefully we'll have an opportunity to do that again before the end of the year. But again, it's going to be a combination of how the markets unfold between now and year-end and whether that matches up well with what we have to offer.

Great. Thanks a lot.

(OPERATOR INSTRUCTIONS) Gentlemen, there appear to be no further questions. The floor is yours for any closing remarks.

Well, thank you all again for listening. We look forward to staying in touch with you all and reporting on our next quarter's progress. Have a great day.

Thank you. This does conclude today's Cohen & Steers conference call. You may now disconnect your lines.