Cohen & Steers Inc (CNS) 2008 Q2 法說會逐字稿

Good morning. My name is Sharon, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Cohen & Steers Second Quarter 2008 Financial Results Conference Call. (OPERATOR INSTRUCTIONS)

It is now my pleasure to turn the floor over to Salvatore Rappa, Senior Vice President and Associate General Counsel. Sir, you may begin your Conference.

Thank you, and welcome to the Cohen & Steers Second Quarter 2008 Earnings 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 Marty, 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 2007 Form 10-K, which is available on our Web site at Cohenandsteers.com. I want to remind you that the Company assumes no duty to update any forward-looking statements.

Also, the presentation we make 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 these pro forma metrics and their GAAP reconciliations, you should refer to the financial data contained in our previous earnings releases.

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. For more complete information about the funds we will discuss today, including charges, expenses and risks, please call 800-330-7348 for a prospectus.

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

Thank you, Sal. Good morning, and thank you for joining us today.

Let me just go through the headline numbers. Then I'd like to talk about some business trends that wave noticed in the first half of this year, and then look at the balance of the year.

As we reported last night, we earned $0.32 per share in the second quarter of 2008. That compares with $0.44 per share a year ago and $0.31 per share in the first quarter of 2008.

Our assets under management were $27 billion. That compares to $34.6 billion a year ago and $28.6 billion in the first quarter.

With respect to our assets under management, that decline that we suffered this year has been entirely due to market depreciation. Our net flows in the past quarter were exactly zero. As you're probably aware, U.S. real estate has been in a bear market since early 2007. And that bear market has now spread to most foreign real estate markets and stock markets in general.

Our largest investment category is global and international real estate securities. And that has done, so far, more poorly than in 2007 this year. The U.S. market has actually held up quite well, with only modest depreciation of 3.6% in the first half of the year. In that same period, the Asia real estate market was down 22.8%, and Europe was down 18.4%.

We can't control or affect the tide of a bear market, of course. But we are, nonetheless, pleased with our asset flows. Retail net outflows were $158 million in the second quarter. That's less than the first quarter and, I think, a surprisingly low number when you consider the current state of market sentiment with respect to real estate in general.

Moreover, we had net inflows into our institutional business of $158 million, exactly offsetting those retail net outflows. And we added during the quarter three new -- net three new client relationships.

Our asset-diversification efforts continue at pace. We recorded $367 million of net inflows into our large-cap value portfolios in the second quarter. We think this is a very good development, and we have already secured two large-cap value mandates not included in our current numbers that will be funding before year end. Importantly, these are accounts that are in platforms which have, we think, a substantial amount of growth potential.

We've mentioned in the past, really for the past couple of years, that we expected this sector to be an important contributor to our asset growth, and we're delighted that this is indeed happening today. I should mention as well, of course, that we also have institutional mandates for real estate that will be funding in the second half of this year.

As we announced earlier this year, we've modified the focus of our utility efforts to include global infrastructure companies. Hereto, we've enjoyed modest but positive net flows into our open-end fund. This is bucking the industry trend of net outflows from utility funds, something that has persisted for a number of years. It's also encouraging that we're seeing some signs of institutional interest in this area.

And finally, in the area of alternatives, we have now begun marketing our global long-short fund, whose objective is to achieve good absolute returns with low volatilities. Our initial investment returns using firm capital have fully met our expectations, and the level of preliminary interest from outside investors is encouraging. We hope to report to you the initial results of our marketing efforts in our next quarterly call.

Investment banking, our other major segment, recorded only modest revenue in the quarter and a modest loss. This is somewhat in line with the rest of the banking industry, but one we hope will improve as the markets do. As we've said repeatedly, this is a business that is unpredictable from quarter to quarter, but has (inaudible) contributor to our profits.

Now let me spend a minute or two on how we see the balance of the year from a business standpoint, and how we are dealing with this challenging environment.

While we can't predict when the equity markets will recover, we are very encouraged by the relative performance of the U.S. REIT market this year. By the way, as of today, or as of this morning, U.S. REITs are up for the year, while just about every major market average is down.

Influencing our performance, of course, will be the foreign markets. And we expect that as is usual, the foreign markets will rotate into a positive territory as time goes on. It's very clear to us that valuations worldwide are today discounting many of the concerns that are currently knowable. When sentiment shifts, we have never been better positioned to benefit as the market leader in this sector. We are only one of a handful, a small handful, of firms that can boast a five-year record of managing global real estate securities portfolios.

Our marketing efforts will continue to concentrate on our non-REIT and alternative strategies that are demonstrating excellent performance. With respect to large-cap value, we now have almost a seven-year composite record and a full three-year performance record for our open-end fund, which I should mention is in the top decile of performance on the one-, three- and five-year periods and is attracting a great deal of attention, as I mentioned earlier.

While we are wary of adding considerably to our headcount, we are finding that the turmoil on Wall Street is presenting us with the ability to make some very opportune strategic hires. Clearly, having a strong balance sheet and a growth plan is very helpful -- this situation is very helpful for our company.

We've always been very cost-conscious at Cohen & Steers, but we continue to look for ways to save money without doing any harm to our business. There is a mentality here and a culture where all of our employees know how important it is to maintain profitability.

Finally, our strong financial position will continue to enable us to incubate new strategies in real time and to take advantage of any opportunities to expand our business that may come out of the chaos that seems to be gripping so many parts of the financial market.

And with that, I'd like to turn it over to Matt Stadler for the financial details.

Thanks, Marty. Good morning, everyone.

Yesterday we reported earnings of $0.32 per share, compared with $0.44 per share reported in the prior year and $0.31 per share sequentially. The decline in earnings from the 2007 period was primarily due to lower average assets under management and lower investment banking fees. We reported revenue for the quarter of $55.3 million, compared with $69.3 million in the prior year and $53.6 million sequentially. Net income for the quarter was $13.6 million, compared with $18.6 million in the prior year and $13 million sequentially.

As a result of extremely challenging market conditions, our assets under management decreased to $27 billion from $28.6 billion at March 31st. Market depreciation accounted for the decline, as net outflows and open-end funds were offset by net inflows and institutional separate accounts.

U.S. REIT common stocks comprised 44% of the total assets we manage, followed by non-U.S. REIT common stocks at 27%, preferreds an 11%, utilities and listed infrastructure at 9%, and large cap value at 5%.

Turning to our two business segments -- in our asset management business, we recorded quarterly revenue of $54.4 million, down 18% from the prior year but up 2% sequentially. The year-over-year decline was primarily attributable to lower average assets during the quarter. Average assets for the quarter were $29.2 billion, compared with $33.7 billion in the prior year and $28.5 billion sequentially.

Our effective fee rate for the quarter and on a year-to-date basis was 65.5 basis points, down 1.5 basis points from the comparable prior periods. The decline was primarily due to lower fee rates in our institutional business, partially offset by higher pay rates in our closed-end funds.

Pretax income for the quarter was $22.7 million, down 23% from last year but up 2% sequentially. Asset management's pretax margin was 42% for the quarter and is 42% on a year-to-date basis.

Now let's review the changes in assets under management. Assets under management in our closed-end mutual funds totaled $9.5 billion at June 30th, a decrease of $193 million or 2% from the first quarter. The decrease in assets under management was the result of market depreciation.

Our open-end funds had assets under management of $7.6 billion at June 30th, a decrease of $788 million or 9% from the first quarter. The decrease in assets under management was attributable to market depreciation of $630 million, combined with net outflows of $158 million.

I should note that we're in the process of adding a distribution partner in Europe and that we recorded net inflows into our non-U.S. open-end mutual funds.

Gross subscriptions for the quarter totaled $660 million. And more importantly, we continued to see a deceleration in the level of outflows.

Assets under management in our institutional separate accounts totaled $9.8 billion at June 30th, a decrease of $629 million or 6% from the first quarter. The decrease was comprised of market depreciation of $787 million, partially offset by net inflows of $158 million.

We recorded net inflows of $236 million into global and international realty portfolios and had net outflows of $443 million from domestic realty portfolios. And as Marty said earlier, our large cap value portfolios recorded net inflows of $367 million.

In our investment banking segment, we recorded quarterly revenue of $840,000, down from $2.9 million in the prior year but up from $51,000 in the first quarter of 2008. The current quarter represented one of our lowest quarters of banking fees, and last quarter represented our lowest quarter. Investment banking revenue remains very unpredictable. The banking segment reported a $783,000 pretax loss for the quarter.

Moving to expenses -- on a sequential basis, expenses were down about 1% in the quarter. Lower amortization of deferred commissions and depreciation and amortization were partially offset by higher employee compensation and G&A. Amortization of deferred commissions decreased 49% from the first quarter. The decrease was primarily due to lower subscriptions in our open-end load mutual funds.

At the end of January, the intangible asset attributable to non-compete agreements established when we went public fully amortized. This resulted in the sequential reduction in depreciation and amortization.

Since our compensation-to-revenue ratio remained at 32.5% for the second quarter, the increase in compensation expense is in line with the growth in revenue. G&A increased 3% sequentially. This increase was primarily attributable to higher technology costs associated with our continued global expansion.

Now turning to the balance sheet -- our cash, cash equivalents and marketable securities totaled $185 million, compared with $180 million last quarter. The $185 million excludes approximately $17 million utilized during the quarter to seed our global real estate long-short fund.

Since we are currently the sole investor in our global real estate long-short fund, the balance sheet in our 10-Q will reflect $26 million of assets and $9 million of liabilities related to the consolidation of the fund onto our books and records. This investment will be deconsolidated after we accumulate sufficient outside investors into the fund. Our stockholders' equity was $278 million, compared with $272 million at March 31st.

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 that our effective tax rate for 2008 would be between 37 and 38%. Our rate for the second quarter 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 approximately 32.5%. Although we continue to maintain control over our expenses, as Marty mentioned, we will also selectively take advantage of opportunities the current market environment presents.

We have committed to expand our global investment in institutional sales teams and have taken additional space in our Hong Kong office. These initiatives will add about $0.01 per share of G&A costs to the third quarter.

We recorded a loss from marketable securities for the quarter versus a gain in the prior year. Please keep in mind that as we continue to commit firm capital to seed additional investment strategies, there may be more volatility in this line item.

As you know, it is quite difficult to predict fees from our banking segment. Although the pipeline remains active, the closer we get to year end, the potential to record fees from M&A or restructuring transactions, which typically generate higher fees, lessen due to the long lead time associated with these activities.

And finally, we do not expect to record any meaningful revenue from the alternative business, which includes our global real estate and long-short fund and our private global real estate fund of funds until next year.

Now I'll turn it back to Marty.

Thanks, Matt.

And with that, why don't we open it up to questions.

(OPERATOR INSTRUCTIONS) Cynthia Mayer, Merrill Lynch.

Hi, good morning.

Just a couple of questions -- one just to follow-up on what you were mentioning about seeding new products. I'm wondering if you have in mind a certain amount of cash that you want to commit to seeding new products. What kind of size portfolio could you end up with?

Cynthia, we don't really have a target. It's been a great use of capital on our balance sheet. And the opportunity to start new initiatives and get track records going -- that's really what dictates how much we invest, rather than having some set number.

Right. The $17 million that would put into the long-short fund is probably one of the bigger amounts that we've done. Typically, when we seed our open-end funds, or put some money in the closed-end funds, it's the lesser amounts. But the amount that we invest will be dictated in part on what the expectation is to market the fund, so that we show a competitive amount of "skin in the game."

Okay.

You guys have such a strong balance sheet; do you want to talk a little about what you want to use it for aside from seed investments? What opportunities are you seeing, or would you consider -- I don't know what your distribution arrangement -- whether that would cost something somehow. But do you see opportunities to expand using your balance sheet?

Well, we're very comfortable with our cash position. And right now, we're very happy to be using it as we are today. But clearly, we hope it doesn't happen, but if this environment in the financial markets and some of the other asset managers -- if there are opportunities to expand our business, we certainly are open to looking at that. But we don't have a capital plan right now to do anything specifically, but really wait for opportunities, either internally or externally.

I know that sounds very generic, but it's exactly where we are today.

Okay.

And then, just a couple quick questions on flows -- you had nice inflows at that large value fund, but outflows from REITs on separate accounts. And I'm just wondering what you attribute the outflows from REIT products to at separate accounts at this stage. Is there a sense among institutional clients that REIT underperformance is likely to continue or come back? Or are they just being risk-averse, or are they going to passive vehicles?

Cynthia, it's Bob.

I think the sentiment institutionally is still fairly disciplined -- that they're adhering to the asset allocation. You are continuing to see institutions who don't have international exposure taking some money out of U.S. REITs and putting them into non-U.S. strategies. So non-U.S. REIT strategies continue to gain share from U.S. only. And that's a trend that's in place.

Frankly, we have started to see an increase in inquiries about our views on is the U.S. REIT market looking cheap now, and things like that. So I'm not sure where that's going to -- how that's going to manifest itself. But we don't really see institutionally any concern about the viability of the strategy or the asset class. And as you've seen, we've been -- the flows to U.S. REIT strategies, both industry-wide and for us in particular, have under the circumstances been quite muted.

I'd add -- what you don't see at the aggregate level is the fact that we had five or six U.S. clients who are disciplined asset allocators add to their accounts over the quarter as REITs went down.

Rebalancing?

Correct. Yes.

Okay.

And just last question is -- in the mutual fund space, seems like the ETFs and index funds have held their own pretty well over the last few months. And I'm wondering what you think -- whether you think they'll continue to gain share, and what would cause the pendulum to swing the other way.

Well, I think it's -- not only for us, but across the spectrum of the asset management industry -- that the trend is very clear -- that if you consistently add alpha, you're going to get lots of assets. If you're not, you're going to be losing assets in ETFs and passive strategies somewhere in between. So I think the small group of asset managers that consistently outperform in passive will continue to gain share at the expense of the rest of the industry.

Okay, thank you.

Mike Carrier, UBS.

Matt, you mentioned your distribution partner in Europe, and Marty, you kind of hinted at it. If you look at the institutional market, both in the U.S. and then outside the U.S., trying to get a sense on -- when you look at the opportunity, where are you in terms of penetrating all those accounts?

Is the question how far --

Yes.

-- this opportunity are we?

Right. In the U.S., I guess it's easier to gauge, because you can look at the top 100 or 200 pension plans. Internationally it's a little bit more difficult. But just when you're looking at the size of the institutional market, and those that are investing in real estate or value or the infrastructure funds that you guys offer -- just trying to figure out -- you've been focused on distribution -- hiring more relationship managers. When you look at the opportunity in that institutional market, what percentage of the market are you talking to today versus the opportunity that's out there?

Sure. I would say that outside of the United States, institutions are about where institutions in the U.S. were in the early '90s, which is to say there's been -- outside of certain pockets like the Netherlands, who have long been investing in real estate stocks, most of Europe, the UK and Asian institutions are at the extremely early stage of embracing securitization. And to the extent they have significant allocations to real estate, it tends to be in sort of the old-fashioned bricks-and-mortar approach.

And so, I would answer your question by saying we're very pleased with some of the institutional intermediary relationships that we're lining up. And they're both in Asia and in Europe, and they're going to be very powerful. But they have been giving us access mainly to retail high-net worth type investors. I would say that the penetration of real estate security strategies with institutions outside the U.S. has barely occurred.

Does that answer your question?

Yes, thanks.

Just to follow up on the cash question -- you mentioned kind of what your priorities are right now, but you also mentioned that there's opportunities out there. You guys have been focused more on the income-oriented types of products, whether it's the REITs, the preferreds, the value, the infrastructure, utilities. I'm just trying to figure out, is there anything else out there that, if you had a good opportunity, would fill a gap that you think that you have? Or is it just more -- if there's opportunities that come up just across the board, that you may consider it?

I would say that what we're not looking for is to just buy something that is cheap, or to add something simply because it doesn't cost us much. You've identified the types of related investment strategies that we have focused on. And our criteria is income-oriented equity strategies that we think are and will be in strong demand. And if we can add similar strategies and extend our brand in this regard, while still doing it in a way where the team that's managing it is among if not the best in class, those strategies are things we would consider.

Okay.

And then, Matt, just one for you -- given the decline in the market in June -- and this is pretty much across all asset classes and all asset managers -- just the average AUM levels going into the third quarter and the back half of the year are going to be on the low end. Anything on the expense side? You kind of mentioned the compensation ratio in G&A going up. But anything else that you feel like you have a little bit more room to manage in the near term?

We're constantly looking at controllable expenses. And obviously we're going to, as the second half starts to unfold, constantly revise and reassess requirements to expend money. That said, we don't want it to be at the detriment to growing the business. So there are opportunities, and there are things. And the only way that we can deliver new distribution partners and get new institutional mandates is to be active and be visiting them.

So it's a tough balance. I know the captions G&A and embedded in G&A are a lot of controllable and non-controllable expenses. I think the third quarter's going to see the spike. I don't know necessarily that the fourth quarter would be -- we're hoping that the fourth quarter would obviously be lower, because there are certain things embedded in recruiting of some of the individuals that I mentioned that would not reoccur in the fourth quarter. Obviously the rent will. But we're doing the best we can.

All right, thanks, guys.

(OPERATOR INSTRUCTIONS) Erin Caddell, Hovde Capital.

Hi, Erin Caddell, Hovde Capital. Can you hear me okay?

Very well.

Thank you for taking my question.

I was just wondering if I could follow up on your earlier comments, just kind of about the overall market. And over the years, you've talked about kind of the correlation between just kind of the overall health of the REIT sector or commercial real estate with employment. And I guess, do you have kind of an overall macro view of whether we're in a recession, heading into a recession; the depth of that, if it occurs; and then kind of how at least the fundamentals of the sectors in which you invest -- be it office or apartments or -- just the different sectors -- are kind of holding up in your view in terms of occupancy rates, renewal rates; all that kind of stuff?

Sure. This is Joe Harvey. Let me take a crack at that.

Clearly, we're in a very uncertain and volatile environment. And I think the question about whether technically we're in recession or not really misses the point. It's become a much more challenging economy. And things are -- considering that that's the most important driver for the real estate business, fundamentals have been decelerating. And I think there are certain property types where they could turn negative for awhile.

Now, the stocks started turning down at the beginning of last year. So the market's been anticipating this. And just to give you a sense, on a global basis, the market's trading at about a 20, 25% discount to what we think the underlying real estate is worth.

But in terms of our view, we see the global economy slowing. One of the factors with inflation around the world is it's stopped central banks from being able to ease. The good news about the U.S. is that we've already eased a lot. That said, I think the economy's going to be tougher for probably a longer period of time.

The other part of the equation, just as it relates to fundamentals and real estate values, is the credit markets. We've also been in an extremely difficult and probably one of the worst credit crises ever. I guess it's our view that we're working through it; maybe we're two thirds of the way through that process. And there's going to be a point in time over the next six months where the strongest banks will know what their situations are, and they're going to want to start lending again. That capital is going to go to some of the best-positioned real estate companies out there, companies we call the realty majors.

And so our portfolios are positioned -- highly concentrated in those with the strongest balance sheets, which is both a defensive position and an offensive position. Because once we work further through this, there are going to be some pretty good acquisition opportunities for the companies that we invest in. And that will help rejuvenate the cycle in terms of the companies beginning to gain market share once again.

Okay. That's very helpful, appreciate it.

Thank you.

At this time, I'd like to turn the floor back over to management for any further remarks.

Well, once again, thank you for joining us today. And we look forward to reporting to you and hearing your questions in our next quarterly conference call.

This concludes today's Cohen & Steers Conference Call. You may now disconnect, and have a good day.