Cohen & Steers Inc (CNS) 2008 Q1 法說會逐字稿

Ladies and gentlemen, this is the operator. Today's Cohen and Steers conference call is scheduled to begin momentarily. Until that time, your lines will again be placed on music hold. (OPERATOR INSNTRUCTIONS).

Welcome to the Cohen and Steers First Quarter 2008 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, please press star and the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. If you have previously pressed star, one to pose a question, we request that you press the pound sign and then press star, one again. Thank you.

I would now like to turn the call over to Mr. Sal Rappa, Senior Vice President and Associate General Counsel. Please go ahead, sir.

Thank you, and welcome to the Cohen and Steers First Quarter 2008 Earning conference call. Joining me are Co-Chairman 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 Bob, I'd like to make the following remarks.

Yesterday we issued a press release announcing our First Quarter 2008 results. The press release, which is available on our website at cohenandsteers.com, contains information that we believe is useful in helping you evaluate our performance during the quarter. I want to point out that during the course of this conference call we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties, and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. We believe that some of these factors are described in the Risk Factor section of our 2007 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, 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 a fund that has filed a registration statement with the SEC, which has 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 Bob.

Thank you, Sal. Good morning , everyone. As usual, I'll start out by highlighting the headline numbers and then touch on major developments in the quarter. Matt Stadler will provide you with the details behind the headline numbers, and then I'll close with some thoughts on objectives for the balance of the year.

As I'm sure you've seen by now, we've reported earnings of $13 million, or $0.31 a share for the quarter, compared to net income of $22.3 million, or $0.52 a share a year ago. Assets under management ended the quarter at $28.6 billion, which was down from $29.8 billion at year end, and $33.6 billion last year.

As I'm sure I don't need to tell anyone in this call, the first quarter was among the most volatile and challenging periods for our financial markets in recent memory. That said, outside of the market volatility, which we obviously can't control, we were pleased with the progress that was made during the quarter.

First, let me discuss the three factors which accounted for the negative year-over-year and quarterly comparisons. They were share price declines and volatility in nearly every asset class that we manage, a goose egg for investment banking, and modest net outflows.

First, with respect to REIT share price movements, which account for 46% of our assets under management, U.S. REIT stocks peaked in February of last year and declined 39% from then to the apparent trough in January of this year, significantly affecting our year-over-year comparisons. In addition, because REIT share prices have been extremely volatile, it's important to note that, while end-of-quarter assets declined 4% versus December of last year, average assets declined 14%. Secondly, not unlike the entire investment banking sector where transaction activity was put on hold during the quarter, our investment banking group reported no material revenue in the quarter and incurred a pretax loss of $1.5 million. Then lastly, also in the quarter, institutional and retail net flows were both slightly negative at $283million and $242 million, respectively.

Looking forward, as I've said, we're encouraged by a number of positive developments in the quarter. U.S. REIT stocks, following a weak January, ended the quarter up roughly 1% and up 16% from their January lows. That momentum has carried over into April, with an additional 7% gain month to date. Importantly, relative performance in the quarter was strong across the board. I would especially highlight the record of our Value team, which, at the end of the quarter, is now ranked in the top decile for each of the one-, three-, and five-year time periods versus their institutional peer group.

Not surprisingly, institutional interest in our value strategy is strong and increasing. We were awarded approximately $400 million in separate account mandates during the quarter, which will be funded this month but were not included in our first quarter flows.

Our Utility team has substantially expanded its mandate to include global-listed infrastructure stocks, a young but rapidly growing market sector. As part of our joint effort with ALPS Distributors, we are working to launch our second REIT ETF, Cohen and Steers Global Realty Majors. The fund is currently in registration with the SEC.

Consistent with our ongoing plans to expand into alternative investment strategies, Todd Voigt, who joined us during the quarter, has launched our initial global REIT long-short portfolio. As we announced this week, Steve Coyle and his team from City Property Investors are joining us to develop and manage our global real estate fund of funds and multi-manager strategies.

Lastly, although our investment banking group had no material transactions to report in the first quarter, the activity level has picked up, and the pipeline is now fairly full and growing.

With that, I will hand the floor over to

Thanks, Bob. Good morning, everyone. Yesterday we reported earnings of $0.31 per share, compared with $0.52 per share reported in the prior year, and $0.44 per share sequentially. The decline in earnings was primarily due to lower investment banking fees and lower average assets under management. We reported revenue for the quarter of $53.6 million, compared with $76.8 million in the prior year, and $66.9 million sequentially. Net income for the quarter was $13 million, compared with $22.3 million in the prior year, and $18.7 million sequentially.

Our assets under management decreased to $28.6 billion, from $29.8 billion at December 31. Market depreciation in closed-end and open-end funds, as well as net outflows in open-end funds and institutional separate accounts, accounted for the decline.

U.S. REIT common stocks comprised 46% of total assets, down from 53% last year. International securities comprised 30% of total assets, up from 25% a year ago. Non-U.S. investors now account for 21% of the assets we manage.

Turning to our two business segments, in our asset management business we recorded quarterly revenue of $53.6 million, down 12% from the prior year, and down 15% sequentially. Average assets for the quarter were $28.5 billion, compared with $31.1 billion in the prior year, and $33.1 billion sequentially.

Our effective fee rate for the quarter was 65 basis points, compared with 67 basis points in the prior year, and 65 basis points sequentially. The two-basis-point decline from last year's first quarter was primarily due to lower fees in our institutional business, resulting from a higher proportion of subadvised accounts.

Pretax income for the quarter was $22.1 million, down 17% from last year, and down 24% sequentially. Asset management's pretax margin for the quarter was 42%. In computing our pretax margin, we add back the amortization of intangible assets. As a reminder, as of January 31 the intangible asset established with the issuance of vested restricted stock units to certain employees at the time of our IPO was fully amortized.

Now let's review the changes in assets under management. Assets under management in our closed-end mutual funds totaled $9.7 billion at March 31, a decrease of $550 million, or 5%, from the fourth quarter. The decrease in assets under management was the result of market depreciation. Our open-end funds had assets under management of $8.4 billion at March 31, a decrease of $468 million, or 5%, from the fourth quarter. The decrease in assets under management was attributable to net outflows of $243 million, most of which occurred in our International Realty Fund, combined with market depreciation of $225 million. Gross subscriptions to the quarter totaled $888 million and, more importantly, we saw a deceleration of outflows as the quarter progressed, and this trend has continued into April.

Assets under management in our institutional separate accounts totaled $10.4 billion at March 31, a decrease of $198 million, or 2% from the fourth quarter. The decrease was comprised of net outflows of $283 million, partially offset by market appreciation of $84 million. Subadvisory accounts, which are more retail-like in behavior, add $392 million of net outflows. Direct institutional separate accounts had $109 million of net inflows.

In our investment banking segment we recorded quarterly revenue of $51,000, down from $15.7 million in the prior year, and down from $3.8 million in the fourth quarter of 2007. The current quarter represented our lowest quarter of banking fees, while last year's quarter represented our highest quarter of banking fees. Clearly, our investors' banking revenue remains very unpredictable. The banking segment reported a $1.5 million pretax loss for the quarter.

Moving to expenses, on a sequential basis expenses were down 11% in the first quarter. GNA is down 18% sequentially. This decrease is primarily due to lower recruiting fees, a decrease in travel, and lower professional fees. Last quarter we mentioned we incurred recruiting fees for several strategic hires and some legal expenses related to the implementation of certain industry-wide European regulatory initiatives that would not recur. Generally, distribution and service fee expense will vary, based upon the average asset levels in our open-end mutual funds. The sequential variance is in line with the lower average asset levels during the quarter.

At the end of January, the intangible asset attributable to noncompete agreements established when we went public fully amortized. This resulted in the sequential reduction in depreciation and amortization. As a result of the reduction of open-end mutual fund subscriptions, amortization of deferred commissions decreased from the fourth quarter.

Turning the balance sheet, our cash, cash equivalents, and marketable investments totaled $180 million, compared with $231 million last quarter. Please bear in mind that we utilized cash to repurchase approximately $30 million of our common stock in order to satisfy employee tax obligations related to the delivery of restricted stock units in January. Our stockholders' equity was $272 million, compared with $282 million at December 31.

Let me briefly discuss a few items that will have an impact on our second-quarter result. The first item is our effective tax rate. Last quarter we mentioned on the call that our effective tax rate for 2008 would be between 37% and 38%. Our rate through the first quarter was 37%, and we expect to maintain this rate throughout the rest of the year. With respect to compensation, we expect to maintain our compensation-to-revenue ratio at approximately 32.5%. Finally, we do not expect to record any meaningful revenue from the alternative business until early 2009.

Now I'll turn it back to Bob.

Great. Thanks, Matt. Looking ahead, we remain focused on, of course, maintaining our currently strong performance across all of our strategies. We also plan to selectively add new and innovative strategies, especially in the alternative space. In addition, we are focused on improving our sales productivity, with a special focus on our Value and alternative strategies. Of course, maintaining our strong balance sheet in order to have flexibility to capitalize on both tactical and strategic opportunities as they arise.

Lastly, I'd like to add a few comments regarding the Auction Market Preferred, or "AMP," situation just to make sure there is clarity on AMPs and our company. AMPs are the primary source of leverage which is employed in our closed-end funds. As you may know, they account for approximately 10% of our assets under management. In the first quarter the AMP market became frozen, resulting in the loss of liquidity for holders and triggering a penalty reset mechanism for our funds. Although AMPs are perpetual securities, we're currently evaluating a range of options that could potentially diversify and lower the current and future costs of our fund's leverage.

While it's too soon to say which, if any, other options we may decide to implement, I can say that, based on what we know today, and outside of asset coverage tests, which we are in compliance with for the [inaudible] and our Triple A rating, we do not currently foresee any scenario under which we'd be required to delever our funds.

I'll stop there and hand it back to the operator for Q and A.

Thank you. At this time, I would like to remind everyone if you would like to pose a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q and A roster.

Your first question is coming from Mike Carrier of UBS.

A question on the alternative opportunity, just given some of the recent hires and that it's a 2009 later opportunity. When you guys used to talk about the international opportunity for real estate, you used to be able to kind of size the marketplace there. If you look at the alternative space, do you have any idea of what the target market is, both in terms of asset size? Then, what distribution channels are you seeing the demand for? Then, what the fee structures would be on any of these products?

Well, with respect to the market sizes, certainly we believe that the fund of funds--real estate fund of funds opportunity is a global opportunity. It is an institutional opportunity, and it is a retail opportunity. The opportunity goes beyond just fund of funds. I think the opportunity is to deliver both listed and unlisted real estate on a global basis in a sophisticated fashion to institutions and to individual investors. We think, looking out five years--three to five years, the size of the opportunity for us can be anywhere from $3 billion to a lot more than $3 billion. We think it's already a significant market, but it's growing very rapidly, and it could be quite large.

With respect to the REIT hedge strategy opportunity, I don't think it's as big a market, but it's an exciting market. It's a great investment opportunity, and you probably have as good an idea of what the fee structures are there as we do.

Okay. Matt, you were mentioning through the quarter, then thus far in April, that you see the deceleration in some of the outflows. It seems like just with REIT markets up for the year, you see some stabilization in the net flow numbers. I'm just curious, either Marty or Bob, if you're looking out over the next year or two, and you look at past cycles, you've got to have on one side higher inflation, which typically you want to own real estate in that environment. Then on the other side, you have the economic issues and some real estate issues. Which forces do you see as having more weight in this environment? What do you see the outlook for the real estate opportunities going forward?

This is Marty. I think the most important factor in real estate, and for that matter, most other industries, is the state of the economy. Our feeling, and I think the stocks are saying this, is that the massive fiscal and monetary stimulus that's in the system today is going to eventually take us out of this slow-down. Whether that's in the third quarter, the fourth quarter, or the first quarter of '09, hard to say. Certainly there is a prospect of that happening, based on what we see today.

The commercial real estate markets fortunately did not have enough time to overbuild at the end of the capital cycle, which occurred mid-year last year. You'll hear a lot about layoffs, and you'll hear a lot about the consumer. Essentially, there's not a lot of overbuilding. There's not a lot of unwanted vacant space today. That may increase, but we don't see it increasing materially. With a better economy, we think that the demand for space can increase quite rapidly. With respect to inflation--let me finish that thought. If we're right on the economy, then we think that the real estate cycle can restart from a relatively high base. We think that could be what the stocks are telling us today.

With respect to inflation, real estate has traditionally been a very good inflation hedge. The problem has often been that when we've had inflation, we've also had high vacancy rates. As I was fond of saying, you can't raise rent if you don't have tenants. That's not the case today. As you have higher inflation, higher replacement costs--again, if the economy was to continue growing--then real estate could be an excellent inflation hedge. You could see above-average nominal growth in ranks. Maybe not real, but certainly nominal growth in rents over the next several years.

Okay. Thanks, guys.

Thank you. Once again as a reminder, if you would like to pose a question, please press star, then the number one on your telephone keypad.

Your next question is coming from Cynthia Mayer of Merrill Lynch.

Hi, good morning. Just a couple of questions on the--I guess one very targeted one on the comp-to-revenues ratio guidance. Wasn't that a little bit lower last quarter? More generally, are you a little bit worried that you're building new expenses at a time of depressed AUM?

Well, last quarter, of course, was the true-up quarter where we got perfect knowledge. That's really an anomaly, based on where we were going throughout '07. We did say on the call last quarter that we thought we'd be between 32% and 33%, given the headwinds of where we're at. I think we're pretty comfortable with that level. That level constitutes [read] flat where they are, and a little tweak in the pool, so it's a joint sharing there.

With respect to hiring the people and bringing on the teams, we have and we will continue to manage the business with a view towards future growth, rather than look at bogies that are out there and say, "Well, here's the contingent, so we have to meet this quarter, so let's not get into this business." I think we were first to really go into the international, make an investment, and open up offices. There's been a lot of questions in recent calls about our appetite for alternatives, and we said we had nothing to report. That didn't mean that we weren't very busy contemplating a lot of opportunities. We finally found a couple that are, what we think, are perfect fits. We're more than happy to make that investment. Even though it might create some short-term differences between consensus, we feel we're delivering for our shareholder future value.

If I could add to that, Cynthia--it's Bob. I think we demonstrated in the first quarter that we had terrific cost control in the short-run. We're certainly focused on that. We're not oblivious to the turmoil in the financial market. As Matt said, and as I think you know, we've been working on developing these alternative strategies, customized solutions for several years now. This is the culmination of that. Frankly, we had the opportunity to bring on, in Todd Voigt and Steve Coyle, literally industry leaders to head up these areas, and in the case of Steve bringing the team with him. These are tremendous growth opportunities that we identified several years ago, we've executed on. I think we feel we're doing a pretty good job of balancing being prudent in short-term costs, but continuing , as Matt said, to implement our long-term growth

Okay, great. That makes sense. By the way, you were right--your guidance last time was 32% to 33%, so sorry about that. On another topic, on the mutual funds, I'm wondering--it looked to me like recently more share has been going to ETFs in the industry, and you guys are starting a second ETF--I'm wondering to what extent you think the mutual fund investment decision for REITs is an asset allocation decision and sort of more prone to use of REITs than other asset classes?

Cynthia, it's Marty. I think--

I guess, do you see any trends in that direction?

We see it on the individual investor's side, the RIA, the SA, and also the large institutions that we manage money for. Increasingly, these investors are using publicly traded as a way to get exposure to real estate. The success of the public market, over a very long period of time, has attracted them--the liquidity and all the pieces that we know. Interestingly, we are finding with some institutions that the decline that we had in REIT prices over the last year has encouraged them to accelerate their commitment to this because of the value proposition that they see. They're actually seeing REITs as cheaper than direct real estate. We always expect there will be things like ETFs that will take market share from the open-end fund world. We already are the manager of the largest real estate ETFs, ITF, which is over $2 billion. We will be launching our global ETF, which we hope to be successful as well. The fact that we can be in that market just gives us another leg of growth.

[Matt Stadler] I would just add to that as well, Cynthia, that I think that you need to be careful in just looking at the absolute flows in the ETFs, because particularly there's one or two that have become the primary hedging vehicles for hedge funds. Flows into ETFs are certainly not just retail.

Let me add to that. I think, at the risk of repeating what Bob may have already said. Take that same real estate allocation decision that large institutions are making. Many of them do want to have direct exposure to real estate but don't have the capabilities of deciding which fund or private equity investment is better than another. In fact, that world has gotten much more complex because of the many offerings there are and now the global offerings that there are. The ability to provide a multi-manager platform to those investors is something that we think--it's not a large market today. Our instinct and our inquiries tell us that this could be a very large market as we go forward. Not unlike what we did in the REIT world, where we were the pioneers in providing liquid real estate solutions to investors, we think we can do the same thing on the private side here.

Okay. On the ETF you're launching, are you thinking of that more as a retail or an institutional product or both?

[Matt Stadler] Both.

Yeah, I think as I said, as we've seen in our existing ETF and the other REIT ETFs out there, there's probably as much institutional money going into these as retail.

Great. Okay, thank you.

Thank you. Your next question is coming from Marc Irizarry of Goldman Sachs.

Oh, great, thanks. Hey, everybody.

Good morning.

Good morning.

Question on the alternatives business. How much of your own capital and your own balance sheet do you sort of want to devote over time to alternatives versus seeding other products? Thanks.

[Matt Stadler] You know, we've dedicated a part of our balance sheet because it's necessary to co-invest in some of these vehicles. I think we're reluctant to give you a number, but we typically put $5million into a seed investment that shows up in our footnotes as to what we have in new vehicles. One of the great benefits of having a liquid balance sheet like we have is that we are prepared to invest whatever it takes to be a serious player in the marketplace. That's really the philosophy of the company. Having that balance sheet enables us to do that.

Do you at all sort of manage the--how do you think about the mix of investments on your balance sheet? If alternatives is where you see the greatest need to invest your own capital side-by-side with the investors, could alternatives be 50% of your balance sheet investments, or would you try and manage that in some way?

[Matt Stadler] I don't think it's going to be 50%. I think we've got some investments in some of our seed mutual funds that we've recently launched, and that's been in there. We're going to be realizing those gains in the past. I think we've set aside an amount. It's going to vary based upon what we think we're going to raise in each of the funds, but I don't think it's going to be at the 50% level.

[Marty Cohen] It's going to evolve. I would say that the more we have invested, the more successful we will have been in raising outside capital. We'll cite the investment to the amount of capital that's required to be a success.

Understood, thanks. Just some housekeeping questions on the model, your DNA in the first quarter. Is that the right run rate to think about going forward?

[Matt Stadler] I think you'll probably have it pick up a little bit in the next few quarters, only because these teams that we hired--there's going to be some org costs and expenses that are going to be shared by the corporate entity, so I think you're going to have some uptakes there. I suspect that when the marketing campaign gets underway in earnest, and it will be an international to a degree, the travel might pick up a little bit. I moved them up a little bit, I don't think drastically, but they should move up a little bit as the year goes on.

In DNA ,in particular, anything there in that line item?

[Matt Stadler] Nothing really significant worth the note.

Okay, great. Just for your investment banking business--obviously your expectations, I guess, on revenue are going to be dependent in terms of your pipeline, which seems to be a bit better, obviously, than the run rate of businesses in the first quarter--but how do you think about managing expenses in that business so that maybe if the pipeline's there but it's not coming through? Can you sort of dial back there a little bit? Thanks.

[Matt Stadler] We definitely monitor the expenses in that area. I think the biggest governor in that area is just based upon the paradigm of how that segment views its compensation. They've got a very big vested interest in controlling costs as well. I think the cost that that segment generates, whether they're producing $25 million or $30 million on an annual run rate or something less than that are always very well controlled.

Great, thanks.

Thank you. This ends our question and answer session. I will turn the floor over back to Bob Steers for any closing remarks.

Great. Well, thank you all for joining us today. We look forward to speaking with you next quarter. Thank you.

Thank you. This concludes today's Cohen and Steers First Quarter 2008 Financial Results conference call. You may now disconnect.