Cohen & Steers Inc (CNS) 2007 Q3 法說會逐字稿

Welcome to the Cohen & Steers third quarter 2007 financial results conference call. My name is Barbara and I will be your conference operator today. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Salvatore Rappa, Senior Vice President, Associate General Counsel. Please go ahead sir.

Welcome to the Cohen & Steers third quarter 2007 earnings conference call. Joining me are Co-Chairmen and Co-Chief Executive Officers, Marty Cohen and Bob Steers; our President, Joseph Harvey; 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 our third 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 section of our 2006 Form 10-K, which is also available on our website. 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 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 cash performance is not a guarantee of future performance. 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.

Good morning everyone. As usual, what I'm going to do is briefly highlight the headline numbers, which you have hopefully seen by now, and then touch on some major accomplishments during the quarter. Matt Stadler will expand on the headline numbers. And then we will close with some goals and objectives for the balance of this year and looking into next.

As I'm sure you have seen by now, we reported earnings of $15.9 million or $0.37 per share. However, this included an after-tax expense of $0.09 per share related to the payment of a structuring fee on our closed-end fund launch in July. After adjusting for this onetime expense, earnings per share would have been $0.46 per share compared to $0.39 in last year's third quarter.

Assets under management rose slightly about 0.5% on a sequential basis to $34.7 billion, up 36% year-over-year. Investment banking registered yet another solid quarter, booking $4.8 million in revenues.

By virtually any measure our third quarter certainly was volatile and challenging for all capital market participants, and represented a good test of our stated strategies aimed at diversifying our product offering, as well as our asset gathering capabilities globally. I would like to take a few minutes to review how we fared during the quarter, and give you an update on some notable and recent strategic developments.

In a nutshell we experienced modest but positive organic growth in assets under management of 1.5% for the quarter annualized, with our closed-end fund and institutional flows remaining strong, while our open-end fund net flows turned negative. As has been the trend for some time, Investment banking results were very solid.

Our performance in the quarter is particularly gratifying to us, given that the U.S. REITs have been in a significant bear market since February, having declined by 28% peak to trough. And while it is still too early to say the downturn is behind us, REITs did rebound strongly in August and September, and are now up 13% from their recent lows.

That we entered this challenging the quarter ahead of the prior quarter and substantially ahead year-over-year in our view was not an accident. So let me share with you some important data points.

Open-end fund, which as you know, typically experience the widest swings in flows and are reflective of short-term investment performance, represent 31% our total assets. In addition, our open-end fund family includes a growing number of funds which are investing internationally in markets with a low correlation to the United States. To date nine U.S. securities represent over 46% of our open-end fund assets.

The launch of Cohen & Steers Global Income Builder during the quarter was very important to us for two strategic reasons. First, it marks a continuation of our thus far successful efforts to raise assets outside of our core REIT strategy. And importantly today non REIT strategies are currently 25% of our total assets.

Second, this product offering represents the beginning of what we expect to be an ongoing stream of customized or hedged products, which are currently in strong demand in both of the retail and institutional channels.

With regard to our plan to develop an international sales and marketing capability, our non-U.S. clients are currently over 19% of our firmwide total assets, up from 7% a year ago. And this trend is accelerating. Our institutional channel, as we reported, has experienced net positive flows in 7 out of the last 8 quarters. And our pipeline of RFPs has never been more full.

Finally, our investment banking business remains strong. And notably over the past four years revenues have grown rapidly, even compared to our core asset management business, and currently represents 11% of our total revenue.

I'm going to stop there and asked Matt to expand on the numbers in the quarter. And then I will close with some thoughts about the next 12 months.

Good morning everyone. Yesterday we reported earnings of $0.37 per share compared with $0.39 per share in the prior year. The 2007 quarter includes a $0.09 per share after-tax expense associated with the structuring fee paid in connection with the offering of Cohen & Steers Global Income Builder, a closed-end mutual fund. After adjusting for this item, earnings per share were $0.46 for the 2007 quarter.

We reported revenue for the quarter of $69.5 million, compared with $54 million in the prior year, and $69.3 million sequentially. I should note that last year's third quarter included our second-highest quarter of banking fees.

Net income for the quarter was $15.9 million, compared with $15.7 million in the prior year, and $18.6 million sequentially. The third quarter of 2007 includes the structuring, and the 2006 quarter includes our second-highest quarter of banking fees.

Despite extremely challenging market conditions, our assets under management increased slightly to $34.7 billion. The launch of Cohen & Steers Global Income Builder in July raised $445 million for our closed-end mutual fund. Institutional separate accounts recorded $152 million of net inflows. And open-end mutual funds recorded $468 million of net outflows, most of which occurred during July and August. This marked the first quarter since June 2005 that we recorded net outflows in open-end mutual funds.

Our overall organic growth rate was 1.5% if you annualize third quarter flows, and 31% for the last 12 months.

We continued to broaden our product offerings with U.S. REIT Common Stock's comprising 46% of total assets, down from 65% last year. International securities comprised 30% of total assets, up from 12% a year ago. And non-U.S. investors now account for 19% of the assets we manage.

Now I will review the performance of our two business segments. In our asset management business, we reported quarterly revenue of $64.6 million, up 47% from the prior year, but down 3% sequentially. The sequential decline was attributable to lower average asset levels during the quarter.

Pretax income for the quarter was $23.7 million compared with $17.2 million in the prior year, and $29.6 million sequentially. Again, the third quarter of 2007 includes the structuring fee of approximately $6 million. After adjusting for this item, asset management's pretax income in the third quarter of 2007 was $29.5 million.

Asset management's pretax margin for the quarter was 47%. In computing our pretax margin, we add back the structuring fee and the amortization of intangible assets, which are primarily attributable to noncompete agreements.

Now let's review the changes in assets under management. Assets under management in our closed-end mutual funds totaled $11.4 billion at September 30, an increase of $180 million or 2% from the second quarter. The increase in assets under management was attributable to the launch of Cohen & Steers Global Income Builder, and was partially offset by market depreciation.

Our open-end mutual funds had assets under management of $10.8 billion at September 30, a decrease of $277 million or 2% from the second quarter. The decrease in assets under management was attributable to net outflows of $468 million, partially offset by market depreciation of $191 million. Gross subscriptions for the quarter told $951 million, our fourth highest level, quite an accomplishment given the market conditions. Although we had net outflows for the quarter, our organic growth rate for the last 12 months for open-end mutual funds was 32%.

Assets under management in our institutional separate accounts reached a record $12.5 billion at September 30, an increase of $260 million or 2% from the second quarter. The increase was comprised of net inflows of $152 million and market appreciation of $108 million. I should note that we added our first new Australian institutional separate account relationship this quarter, an important development in a market we have been focusing on for some time.

Our organic growth rate for institutional separate accounts was 5% if you annualize third quarter flows, and 60% for the last 12 months.

In our investment banking segment we recorded quarterly revenue of $4.8 million, down from $10.4 million in the prior year, which was our second-highest quarter of banking fees, but up from the $2.9 million we recorded in the second quarter of 2007.

Our investment banking revenue remains very unpredictable. The banking segment reported a $1.9 million pretax profit. Fees generated during the quarter were primarily attributable to capital raising and merger advisory assignments. And year-to-date investment banking recorded revenue of $23.5 million, surpassing the previous record for a full year of $18.8 million in 2006.

Moving to expenses, on a sequential basis, excluding the structuring fee, expenses were pretty much flat in the third quarter. Higher G&A and amortization of deferred commissions were just about offset by lower distribution and service fee expense.

Last quarter we mentioned that we expected G&A to increase in the second half of the year resulting from additional space we took at 280 Park Avenue. This accounts for most of the sequential increase in G&A.

As a result of our second-highest level of open-end mutual funds subscriptions last quarter, led by our International Realty Fund, amortization of deferred commissions increased from the second quarter. Generally, distribution and service fee expense will vary based upon the asset level in our open-end mutual funds. The sequential variance is in line with the lower average asset levels during the quarter.

Now turning to the balance sheet, stockholders equity was $275 million. And our cash, cash equivalents and marketable investments totaled $206 million, up from $186 million at June 30. And we remain debt free.

Let me briefly discuss a few items that will have an impact on our fourth quarter results. First, our tax rate. We expect our effective tax rate to remain at 38%. With respect to employee compensation, we expect to maintain our compensation to revenue ratio at around 29%. And with respect to investment banking, we have already recorded a $2.6 million fee attributable to a merger advisory assignment. Although we cannot predict what banking fees will be for the fourth quarter, it is off to a good start.

Now I will turn it back to Bob.

I am going to finish up by just touching briefly on some of our top priorities looking into next year, and then opening it up to questions. Some of the things we are currently focused on includes continuing work on additional product extensions, which are largely international and global, and include long only hedged and passive strategies.

Second, while our domestic sales and marketing teams, both retail and institutionally, are largely set and in place, our European and Asian plans and teams are still unfolding and being executed. And you'll hear more about that in the future.

The focus is to continue to grow our institutional separate account business while establishing additional partnerships for access to programs, platforms and subadvisory opportunities outside of this country.

Firmwide, while we're still hiring, our staff additions are largely filling targeted, strategic functions in areas such as IT, rather than large-scale team building. And lastly, we are working on developing specific plans to further expand and exploit our investment banking franchise.

With that, I'm going to stop and ask the operator to open the lines for questions.

(OPERATOR INSTRUCTIONS). Michael Carrier, UBS.

First a quick question on just the flows or the organic growth. Obviously the quarterly rate of 1.5% annualized versus the last 12 months of 30% plus, just a big differential. On the institutional side was there any noise, and whether it is in the inflows or the outflows, that weighed on that organic growth number this quarter?

I would say just on the retail side, did you see any improvement as the REIT market started to rebound? I am just trying to gauge what we can expect maybe over the next 12 months in terms of a more normalized organic growth rate.

Institutionally, the strength has been actually increasingly broad-based, which is exciting news for us. We continue to see a very high level of activity in global and international REIT mandates. And as Matt mentioned, a lot of the new money coming in is actually from institutions which are not U.S.-based, which is -- we are also seeing good U.S. interest as well, but we are seeing a broadening of the base of investor interest in our international and global REIT strategies.

In addition, we are seeing increasing new business in our non-REIT strategies, notably our value team got a very good substantial and strategically important subadvisory relationships in the quarter. And now that contributed to a nice increase in the assets under management there.

There was -- they also increased the outflows there, because when they change subadvisers there were some clients who just automatically left. So the assets -- a big-time chunk came in and then there was shrinkage in it. But importantly in the value preferred and other areas outside of REITs, we are seeing strong institutional demand. So that is very gratifying.

The retail flows, we don't comment on flows intramonth or quarter, but it wouldn't be a surprise I don't think to say that flows tend to follow performance and in absolute terms. So the decline in REIT share prices, in the U.S. at least, from peak to trough February to end of July, early August of 28% is largely responsible for the flattening out of net flows there, even slightly negative. And so while we don't make predictions, REITs have rebounded strongly off their lows. And certainly future performance will have some influence over the future direction of net flows for our REIT products.

Just given the investments that you made on the distribution side, the international side, do you have in your mind what you think is a long-term organic growth rate, given the investments?

You're talking related to asset gathering from sources outside the U.S.?

It could be overall or outside the U.S., but either one.

Those types of predictions are really impossible to make. What we're excited about is that we are seeing a very leverageable strategy unfold here where we are expanding the range of products that we have, and many of them are not correlated to each other.

At the same time, we are expanding our distribution outside the United States. So that in an environment like this, where maybe retail -- and I think it was an industry phenomenon for much of August -- where investors just stopped making commitments to anything, including mutual funds. When something like that happens it is very gratifying to be able to rely on the Australian market starting to pick up slack, and the European market, and then potentially be Asian market. And then having the closed-end funds capability as well.

Having so many products and having so many distribution channels now on a global basis, the hope is that the majority of these things will be working at any given point in time, even when you're in the middle of a financial our capital markets crisis, which is causing retail to pull in their horns.

Maybe a last question for Matt. The cash level continues to build. It is now north of $200 million, or approaching 15% of your market cap. I am just curious on what guys think are the best strategic uses for the cash? And any time frame, meaning should we expect something to take place before it builds to a quarter or market cap, or is there any threshold that you feel like you will put some of the cash to use?

We're constantly amongst ourselves discussing viable options for the use of the cash, and there are many. Part of this would also be new initiatives and new strategies, refining our growth to the areas where we think it is most advantageous. We monitor the cash. A lot of things are under consideration. Nothing imminent to report at the moment, but it gives us a lot of flexibility to consider a lot of things that we're thinking about strategically.

Cynthia Mayer, Merrill Lynch.

I am just wondering if you have an outlook on closed-end funds in general? And also if you can update us on, I think a while back you mentioned you were interested in developing product for shorting?

The closed-end fund window doesn't appear to be wide open. We do have -- this is Marty. We have a number of filings that when the window does open, and these are -- and a number of different strategies, we are ready to get involved there. As you know, in some of these you've got to be proactive and anticipating, as opposed to waiting for that to happen. So we have been very proactive.

On the issue of long, short we're continuing to explore possibilities with respect to strategies and personnel there. And we expect to have something, but we can't tell you exactly when. But it is a priority of ours, and we're continuing to work on that.

Maybe you said this, but what percent of your flows -- your institutional flows are from outside the -- clients outside the U.S. these days? Or is it so lumpy that you can't really generalize?

We just said 19% of the assets that we manage today are from clients outside the U.S. The majority of the net inflows that we had in separate accounts were for international and global strategies.

So 19% of the assets are from non-U.S. clients -- or the flows, if you look at a full year, in the same proportion basically?

(multiple speakers). Don't think we have that number exactly.

All right. And just --.

If I can add on one -- on the long short side, we have made progress bringing in our quantitative team, which does option overwriting. And in a sense we're in that business not under long short with respect to stocks, but certainly with long short with respect to hedging techniques. Our fund that we offered in the summer, that is an important part of that fund. And also those techniques we are applying to many other portfolios that we manage.

[Aaron Kethaus, Homeseat Capital].

I just was wondering if you could maybe take a little bit of a broader step back. Obviously, there has been a tremendous amount of volatility. I guess I'm kind of speaking more to the U.S. REIT sector than globally. But just based on your view of your -- the companies in which you are invested and things like that, obviously the REITs have bounced back, but there's still a slowing CMBS underwriting volumes and things like that.

When you take a step back and look at the longer-term view, what is your thought on just overall valuations, and the direction for -- really not even so much the stocks but just the REIT sector, be it commercial or malls, or I don't know, and how you kind of parse it out. But do you feel the concerns are overblown, or you are just kind of comfortable where these companies are, etc.?

Let me give you just a few statements on that because I think it is interesting -- always has been of interest to us. We have been doing this for 25 years now. And people tend to be very short-term oriented when it comes to REITs or real estate. When in fact it is probably the longest duration and the asset that has the longest -- you must apply the longest time horizon.

And when you do that, the returns have been spectacular over long periods of time. This is the first year in eight that we have had a substantial correction, where we're actually down for the year. And there seems to be a lot of fundamental and financial market cross current that were affecting this sector.

A lot of those have been sorted out right now with respect to repricing of risk and reallocating capital on a more prudent way. The real estate markets have remained extremely strong. There has been no change in vacancy rates. There has been little change in valuations. And if anything, rents continue to go upward because the demand for space exceeds the supply of space.

If you're going to become negative on real estate, or REITs, you've got to become first negative on the economy. And that is something that will affect all sectors of the financial markets and the stock market.

We are working under the assumption that we have a midcycle slowdown and not a recession. We think that the stocks are basically suggesting the same thing based on their very substantial rebound. They are basically even for the year today -- year to date. And we think that the correction that we had, along with the increases in earnings and dividends that we've had in the industry, set the stage for I think expectations. Rationally we don't expect to see a continuation of the bear market. Now that is an opinion. It is not a fact. But when you took a look at long-term history of real estate and REITs, I don't think that is an unreasonable assumption to make.

How about your outlook for private equity in the sector? Obviously it was a huge benefit to your portfolio earlier in the year.

Private equity was a very important part of the big lift that we had at the end of '06 and the beginning of '07, culminating with the takeover of the largest REIT, Equity Office. So now you have taken away that private equity component because a lot of the financing is not a place.

Interestingly, there are still many real estate advisers, private equity firms, pension funds, and I think very, very importantly, foreign entities, that are extremely interested in owning U.S. real estate today. And that is why I think real estate values have not changed. You may have taken out one buyer of the asset class, but that one buyer has been replaced by many others.

Marc Irizarry, Goldman Sachs.

Just in terms of the fee realization, this quarter it looks like it ticked down sequentially. I would imagine that's probably a result that maybe the retail assets coming in a little bit and some of the outflows. But can you just -- and, Matt, maybe this is a question for you. Can you just maybe address the cost structure and maybe the operating leverage over the next few quarters and then on longer-term basis?

I think what happened with the effective fees, I mean, there were two things. When you look at the average assets our AUM might have been down overall 2%, but our average assets were down closer to 9%.

So when you're looking at the -- I'm talking about the open-end fund area. When you're looking at that, that is part of why the distribution expenses lower, and that is why the fees were lower crude. But you're right that it was a combination of that and a little bit lower effective fee rate. And what happened there was we did not get as many inflows this quarter into our international real estate fund on the open-end inside, which is a higher fee paying fund. So there was a slight erosion there.

With the inflows that we have received, the subadvisory mandate that we got last quarter for the large cap value team, and significantly more assets from Daiwa, reaching certain breakpoints there was a little bit of compression on the separate account side. And both of those were partially offset by a slightly higher effective rate on our closed-end funds because of the IND launch.

Overall there was a little noise back and forth. Still on a year-to-date basis we're close to 67 basis points as a firm. And obviously with flows correct a little bit on the institutional -- on the retail side, we will have -- those will go back to their normal level.

In terms of your cost structure, where it is now, and potential for margin expansion going forward?

I think -- we had 47% on the asset management segment. That is pretty good margin. But I think that -- and 41% on an operating basis. I think that, as Bob alluded to, most of the heavy lifting, both here in the States and abroad with respect to building out teams and getting ourselves to a scale that we are comfortable with, has happened. And that there will be some Fine-tuning going forward, depending upon some of the strategies that get executed, and just in response to growth in client base.

But I think the margins will not be significantly affected by that. I would expect that they would -- there would not be a disproportionate investment of cost relative to the volume of business that we would be bringing in.

I guess just a question philosophically about what we have seen over the last couple of quarters. Let's just assume for a second that the trends, that the business remains in REIT land a little bit more choppy, and retail investors act as they did this quarter over the next several, I don't know, does it at all change your plans for maybe strategic transactions or something to augment your growth beyond REITs in a more accelerated fashion?

We are always looking at opportunities. We do understand and I think this speaks to Cynthia's question as well, we understand that we've got a very good currency and we have a very strong cash position. So we are always looking for opportunities. And the likelihood is it will be in the non-REIT area rather than in the REIT area, because we have built out globally already. But there is nothing to report other than we are always looking.

(OPERATOR INSTRUCTIONS). Mark Fields, private investor.

I had a question regarding the Global Income Builder. And that had to do with -- and I haven't seen it on your website yet. I'm a private investor. I was interested in if you were going to post the top 10 holdings of the Global Income Builder, or if it has already been posted?

That will be posted shortly after the quarterly report is released. So just keep looking for that. I don't have a firm date, but you'll be seeing that shortly.

One other question. I noticed -- I was listening, and I understand that you're going to be creating some new issues. I am assuming some of those are going to be closed-end funds. Do you have any information on when some of the new issues might become available or --?

No, we don't at this moment.

At this time I would like to turn the floor back to Mr. Rappa for any closing comments.

This is Bob Steers. Again, thank you all for listening in this morning. And we look forward to speaking with you after year-end.

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