Cohen & Steers Inc (CNS) 2008 Q3 法說會逐字稿

Welcome to the Cohen & Steers' third quarter 2008 financial results conference call. My name is Vanessa, and I'll be your conference operator today.

At this time, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer period. (OPERATOR INSTRUCTIONS.)

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

Thank you, and welcome to the Cohen & Steers' third quarter 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 Bob, 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 available on our website 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 will 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 within the press release we issued yesterday.

Finally, this presentation will contain information with respect to investment performance of certain of our funds. I want to remind you that past performance is not a guarantee of future performance. 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.

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

Thanks, Sal. Good morning, everyone. As usual, I'll start by highlighting the headline numbers, then move to a discussion of the current environment, and then hand it over to Matt to provide details underlying the headline numbers.

As you know by now, last night we reported a loss of $1.6 million or $0.04 a share for the quarter. This included an after-tax expense of $0.20 a share related to the sale of preferred securities, mainly of Freddie and Fannie. We also recorded a $0.04 per share adjustment to tax expense related to those sales. After adjusting for these items, earnings per share would have been $0.20.

During the quarter assets under management declined 8.7% to $24.6 billion from $27 billion in June. And although U.S. REITs did generate positive returns of about 5% during the quarter, international REITs were off over 20% and value stocks declined by about 10%.

So as a result the bulk of the sequential decline in assets was due to depreciation of $1.9 billion. In addition to that, we experienced net outflows of $465 million, primarily from our open end funds.

Investment banking activity remained depressed in the quarter, with this group posting modest revenues and a pretax loss of $1.3 million.

Before I get into the details regarding the fundamental developments in the quarter, which were on balance very solid, I'd like to first just recognize the elephant in the room which is, of course, the one critical variable we can't control, stock prices.

As you know, thus far, October has been by any measure a disastrous month for virtually all markets, and we have certainly not been immune. As some have already commented on this week, this time diversification has not helped at all.

The indices representing the three strategies that comprise the bulk of our assets under management, which are U.S. REITs, international REITs, and large cap value, as you know, have declined substantially this month. Roughly, well in excess of 35%, 20%, and 20%, respectively.

And while it's our sense and certainly our hope that we're nearing a positive inflection point with respect to the health of our global financial system, as well as valuations for REITs and equities in general, it's clear that the next 12 months will continue to be challenging to navigate.

With this backdrop in mind, let me turn to a review of our progress in the three areas that we can exert control over, which is investment performance, distribution, and our financial management. It's been our experience over numerous cycles that good execution in these three areas, particularly during bear markets, will position us well for the recovery when it does arrive.

Turning to investment performance, in the latest 12 months virtually all of our core real estate and value strategies have exceeded their benchmarks. And in a recent UBS report on public asset managers we were cited for having the highest percentage of assets in the top half of our relevant Lipper peer group categories, which were 98% and 97% of our assets over the past three and 12 month periods.

Additionally, our large cap value fund in August celebrated its three-year anniversary and as a result became eligible for and received its initial Morningstar rating, which were four and five stars depending on share classes.

So by all measures within the context of the markets we're in we feel good about the value our investment teams are adding, particularly in these markets. And, as I've already mentioned, we think this will pay dividends for us when the markets become more accommodative.

Turning to distribution, our institutional sales and marketing area which experienced net outflows of $144 million actually had a very strong quarter. As you may recall, our goals are to add separate accounts, distribution platforms, and sub advisory relationships with leading financial institutions on a global basis. In addition, we have been highly focused on gaining meaningful traction this year with our large cap value strategy.

I'm pleased to report that during the quarter we won a total of 14 new mandates, four of which were for large cap value, six for global REITs, and we also won our first Asia only REIT mandate.

Seven of these new relationships are sub advisory mandates with large financial institutions which we'll fund this quarter or early next year, and we anticipate the initial aggregate capital will exceed $300 million. Importantly, two of these new relationships represent additional non-U.S. distribution. Finally, we also added one defined contribution and two new insurance company platform relationships for our open end funds.

So, clearly, the institutional channel has been an area of strength for us, and looking ahead we're encouraged that the current level of institutional search activity is at record levels and includes all of our strategies.

In the retail channel, market conditions have become increasingly difficult and net outflows in the quarter amounted to $321 million. The outflows were concentrated mainly in one fund, our international realty fund, while our other funds faired relatively well. And on a positive note our sales to Merrill's new UMA Program are positive and continue to improve each quarter throughout the year.

With respect to financial management more than ever in the current environment financial strength and profitability is a huge competitive advantage, and we are highly focused on both.

Our balance sheet remains debt free with in excess of $165 million of total firm liquidity, and we are actively addressing the pressures on profitability that declining assets under management present by managing current costs without abandoning our growth strategies.

And so to give a little more detail on the numbers underlying our -- the trends I've already touched on and to also talk a little bit about our financial management strategies, I'm going to hand it over to Matt Stadler.

Thanks, Bob. Good morning, everyone.

Yesterday, we reported a loss of $0.04 per share, compared with earnings of $0.37 per share in the prior year and earnings of $0.32 per share sequentially. The 2008 quarter includes a $0.20 per share after-tax expense associated with losses recorded on available-for-sale securities, primarily from investments in Fannie Mae preferreds, and a $0.04 per share increase to tax expense associated primarily with these available-for-sale securities. After adjusting for these items, earnings per share were $0.20.

The 2008 quarter also includes a cumulative adjustment to employee compensation, which will be discussed shortly.

The 2007 quarter included a $0.09 per share after-tax expense associated with the previously disclosed structuring fee for the offering of a closed end mutual fund. After adjusting for this item earnings per share were $0.46.

We reported revenue for the quarter of $49.1 million compared with $69.5 million in the prior year and $55.3 million sequentially. The decline was primarily due to lower average assets under management and lower investment banking fees.

Net loss for the quarter was $1.6 million compared with net income of $15.9 million in the prior year and net income of $13.6 million sequentially. The third quarter of 2008 includes the losses recorded on available-for-sale securities and the increase to tax expense, and the 2007 quarter included the closed end fund structuring fee.

Our assets under management decreased to $24.6 billion from $27 billion at June 30th with market depreciation accounting for the majority of the decline. U.S. REIT common stocks comprised 48% of the total assets we manage, followed by international REIT common stocks at 23%, preferreds at 10%, utilities and listed infrastructure at 7%, and large cap value at 5%.

Turning to our two business segments, in our asset management business we recorded quarterly revenue of $48.9 million, down 24% from the prior year, and down 10% sequentially. The declines in revenue are primarily attributable to lower average assets. Average assets for the quarter were $26.2 billion compared with $33.7 billion in the prior year and $29.2 billion sequentially.

Our effective fee rate for the quarter was 66.5 basis points, up from 65.5 basis points the last quarter. The increase was primarily due to higher fee rates in our closed end and open end mutual funds.

Pretax income for the quarter was $4 million compared with $23.7 million in the prior year and $22.7 million sequentially. The third quarter of 2008 includes $10.5 million of losses on available-for-sale investments, and the third quarter of 2007 included the structuring fee of $5.8 million. After adjusting for these items asset management's pretax income was $14.5 million and $29.5 million for the third quarter of 2008 and 2007, respectively.

Asset management's pretax margin was 30% for the quarter and 38% on a year-to-date basis. In computing our pretax margin we added back the available-for-sale loss.

Now, let's review the changes in assets under management. Assets under management in closed end mutual funds totaled $8.6 billion at September 30th, a decrease of $961 million or 10% from the second quarter. The decrease in assets under management was the result of market depreciation. Our open end funds had assets under management of $6.9 billion at September 30th, a decrease of $695 million or 9% from the second quarter. The decrease in assets under management was attributable to market depreciation of $374 million combined with net outflows of $321 million, almost all of which were in our international realty fund.

Assets under management in our institutional separate accounts totaled $9.1 billion at September 30th, a decrease of $680 million or 7% from the second quarter. The decrease was comprised of market depreciation of $536 million and net outflows of $144 million, the majority of which were in sub-advised accounts.

We recorded net outflows of $163 million in global and international realty portfolios and modest net outflows from domestic realty portfolios. Our large cap value and preferred portfolios recorded modest net inflows.

In our investment banking segment we recorded quarterly revenue of $116,000 compared with $4.8 million in the prior year and $840,000 sequentially. Our investment banking revenue remains very unpredictable. The banking segment recorded a $1.3 million pretax loss for the quarter.

Moving to expenses, on a sequential basis expenses were up about 5%. Higher employee compensation, G&A, and distribution and service fees were partially offset by lower amortization of deferred commissions.

Our compensation to revenue ratio estimate for the year increased to 34.5% from our previously disclosed estimate of 32.5%. The cumulative affect of the increase was reported in the third quarter, resulting in a compensation to revenue ratio of 38.9%. The compensation adjustment brings our same store total compensation more in line with the estimated year-over-year revenue decline.

We mentioned last quarter that G&A would increase by about a penny a share, and actually it increased by a little less than that. The increase was primarily due to organizational costs associated with our alternatives business and additional space that we took in our Hong Kong Office that was also obviously previously disclosed.

Distribution and service fees increased 4% sequentially, this was primarily due to the addition of six no-load distribution partners, and amortization of deferred commissions decreased 39% from the second quarter, with the decrease primarily due to lower subscriptions in our open end load mutual funds.

Now, turning to the balance sheet, our cash, cash equivalents, and marketable securities excluding amounts attributable to the consolidation of our global real estate long, short fund totaled $164 million compared with $185 million last quarter.

Since we are currently the sole investor in our global real estate long, short fund the balance sheet in our 10-Q will once again reflect the assets and liabilities for this quarter of approximately $32 million and $8 million, respectively, related to the consolidation of this fund on to our books and records. The investment will be deconsolidated after we accumulate sufficient outside investors into the fund. Our stockholders equity was $254 million compared with $278 million at June 30th.

And I'd like to take a moment now just to discuss our available-for-sale portfolio. The majority of our portfolio is comprised of investment grade preferred securities and seed investments in our mutual funds and track record accounts. Unrealized gains and losses are reflected in other comprehensive income.

Now, just briefly, a few items to discuss that will have an impact on our fourth quarter results. Our effective tax rate for this quarter includes discreet items associated primarily with a valuation allowance on deferred tax assets established in connection with losses on available-for-sale investments. We expect our effective tax rate for the fourth quarter to be 38%.

With respect to employee compensation, we expect to maintain our current compensation to revenue ratio estimate at approximately 34.5%.

As a result of declining net asset values in certain of our closed end mutual funds, we have begun the process of addressing the amount of preferred shares which must be redeemed in order for us to maintain the required leverage ratio. Although it is too early to determine the final amount, we expect some level of de-levering to occur by the end of the year.

Please keep in mind that realized gains and losses will continue to fluctuate as a result of transactions in our track record accounts and our global real estate long, short fund.

With respect to investment banking, the closer we get to yearend the potential to record fees from M&A or restructuring transactions lessen, and as we mentioned last quarter we do not expect to record any meaningful revenue from the alternatives business until next year.

And, finally, we are focused on cost controls, and all of our controllable expenses are under review. Approximately one-third of our G&A is controllable. We will reduce whatever we can without sacrificing our asset gathering efforts.

Now, I'll turn it back to Bob.

Great. Thanks, Matt.

Just looking ahead, obviously, while we're hoping for the best and certainly it's beginning to look less like the current level of valuations is promising, we are planning for if not the worst for a continuation of a difficult market environment.

So as Matt discussed, we do intend to maintain our spending discipline, but we're also going to look for the opportunistic in our asset gathering strategies as we look into '09. And specifically we plan to focus our marketing efforts, as I mentioned earlier, on large cap value, and when the markets allow we will be ready to begin offering our global REIT long, short and our real estate multi-manager strategies along with our other core products.

With that, Operator, why don't we open it up to questions.

(Operator Instructions)Your first question is coming from Mike Carrier of UBS. Go ahead, sir. Your line is live.

Thanks, guys. First, a question for Matt, just on the expense side. You mentioned on the G&A it's about a third, it can be variable, or at least you can take a look at it and figure out what can be reduced.

And then on the compensation side, let's just say currently it's at the 34.5%, if we look to next year and markets don't rebound but you're relative performance is still good, I guess just where is the -- like what portion of that is variable versus fixed costs?

Well, I mean we're not really prepared to discuss '09 just yet. I mean I will say that even at 34.5%, which was a very careful evaluation, to adjust to basically what we felt we needed to keep total comp on a same store basis in line with our projected revenue decline for the year, even at 34.5%, we are significantly below our peer group which is also from early indications trending upward.

Yes.

I think as with most firms the variable component of comp is less than the fixed component. Suffice it to say that we don't know where assets are going to wind-up. We'll be assessing that and on the next quarter's call we'll give some kind of guidance on where we think that ratio will be.

Okay. And then just one other question on -- this is more I guess strategy. But it seems like the long-term strategy just in terms of your products you could get a shift and granted whenever we're in a crisis mode things kind of go -- (inaudible) swing way to one side. But if some of the products, the focus gets away from equities and more towards yielding products that would favor kind of the Cohen & Steers' product mix.

So it seems like long term it's a good trend. And then the relative performance continues to do well. But just given the pressures on the business I guess how do you balance the long-term strategy and the short-term and not necessarily on the cost side, but even on the cash side? It seems like depending if you exclude what you have in investment you may have 20% to 25% of cash on balance sheet relative to your market cap. So it's getting pretty high.

Granted it's good to have cash on the balance sheet in this environment, but just how do you kind of look at when the stock is at a certain price where buy-backs start to make sense or you just want to wait for more stability in the market before you kind of go down that path?

Well, I'll take a stab at that. The -- your observation that when capital comes back into the market it's likely to come into income oriented investments that -- highly secure income streams. We share that view. I think to some extent that's helping to fuel the strength on our institutional side.

And we're -- in this environment I can't say we're really excited about anything, but we actually longer term we feel extremely well positioned both with our existing products and the products that we're poised and ready to launch. They're going to be low risk, highly secure income oriented strategies. And that's who we are.

We feel more comfortable than ever having liquidity and financial strength. We want to bolster that. We're really not too anxious to commit capital to anything right now. We think it's entirely possible that over the next six to 12 months that there could be strategic opportunities that present themselves that will be -- could present an opportunity for us to use some of our financial strength.

But I think in that regard we're going to be counter punchers. This is an environment where I think you want to let the opportunities come to you, and that's the reason that we maintain this cash position. As I said, we're looking to grow it.

Stock buybacks have to compete against these other potential opportunities that come along. So it's difficult to say that at any particular price we'd buy-back stock. That's obviously a financial opportunity that is on the table along with other strategic opportunities. And we're mindful of that and we're ready and looking to evaluate all of these options.

Okay. Thanks, guys.

Thank you. Your next question is coming from [Mark Razzari] from Goldman Sachs. Please go ahead.

Oh, great. Can you just talk about the closed end fund performance, which seemed to be down a good bit more, double digits versus some of the other products I guess on the open end side? And then maybe can you just elaborate, also, on the margin side, Matt, what you think is sort of the target margin for the business should be over time?

This is Joe Harvey. With respect to the closed end fund performance, the majority of our closed end funds are leveraged in the 40% to 45% range, so obviously in down markets that leverage will make those funds' performance worse than unleveraged funds by comparison.

Because of the uncertainties of the markets and the fact that many of these funds are held by individual, primarily by individual investors, the discounts to NAV at which they trade have widened. So those two factors account for what's going on with performance, both at the NAV level and at the stock price level.

Okay. Mark, just with respect to the margin question, we don't really target or run the business to hit a margin per se. Obviously, with assets where they are and the results of this quarter and looking at where our pretax and operating margins are versus where they've historically been, they're a little bit lower, but the business has demonstrated in our sector in particular the leveragability of the franchise. So, therefore the margin is leverageable, as well. And it doesn't take a lot to move it back up.

I think probably since we don't target to a margin and don't budget to that, we'll probably have some guidance not specifically margin related, but on the next call that'll give the sense of where we think certain numbers are going to go, and including comp and taxes and things of that nature, which might be able to help you model that.

Okay. Thank you.

Thank you. Your next question is coming from Cynthia Mayer of Merrill Lynch. Go ahead, ma'am.

Hi, good morning. Just a follow-up on the closed end fund de-leveraging, can you tell us the total of the leverage now in the closed ends, and also have you applied for a waiver in terms of the coverage ratios? Because I know one firm got one, and I don't know if you're going down that path?

Yes, we've -- this is Marty, Cynthia. We've -- we have applied for that exemption in the event that we might need it. We don't need it now. And when you said the total leverage, what do you mean?

Well, I mean if your funds are leveraged at the 40%, 45% range, so would I just take that and apply it to your closed end fund asset basically and say that amount of it is leveraged?

That's about right.

Okay. And then just more generally I'm --

I'm just saying that 50% is the -- there's a limit that we could go to in those funds, after which we would be required to redeem or reduce bank borrowings.

Okay. And is that tested every day or is that, you know, you have to --

We test it every hour, Cynthia.

Oh, okay.

Sure. The volatility of the markets, that's something we watch really closely. And I will tell that our portfolio managers are watching these funds very closely because our strategies in investing in these are very much tied to the amount of leverage that we have, and we try to manage these funds conservatively so that we reduce kind of the -- some of that data that has been problematic in the underlying assets.

Right. Are you at all worried that if the discounts, I mean generally in closed ends remain this big that there'll be arbitragers who come along and just attempt to open end a lot of closed end funds?

You know, we've had, we had some -- two of our funds were subject to a proxy battle last year -- earlier this year. and we satisfied those dissidents, and we take all of the steps that we feel are prudent to reduce discounts. But this is clearly an issue that is plaguing the entire industry. I think the last numbers I saw was the average discount is on the order of 20%. So there might be pressure.

I also think that we are in this -- that we are in the midst of a very unprecedented storm here. And all of the metrics seem not to work for most things today. We believe that that's a temporary phenomenon, and one by one a lot of these issues get sorted out. Particularly the pricing and the pricing of the underlying securities and the pricing of these funds. So I don't think that we're concerned right now.

I mean we always want to improve shareholder returns and we would love to mitigate any discounts, but at this snapshot we believe and it may be wishful thinking but we do believe that this is a snapshot that's not going to persist for a long period of time.

Okay. And then you mentioned strategic opportunities. And looking at some of the other asset managers and the headcount cuts, and I'm wondering if you think the sell-off in the market, including the REIT market could maybe lead some other managers with smaller REIT funds to reconsider even being in that area? Is there any opportunity, any silver lining in this for you, maybe in terms of grabbing a bigger market share of the REIT market?

Cynthia, I think the opportunity set includes that and potentially more. Certainly, smaller managers, there are managers embedded in companies which are larger but primarily direct property, in the direct property business, that are going to be under significant pressure.

And so it's unclear where the opportunities will come from. There may be some opportunities in businesses that are related to what we do, but we're not currently in. It, unfortunately, I think there's going to be a lot of opportunities that come along. Maybe none of them are satisfactory to us from a strategic standpoint. But again for us being unlevered might be as important as having cash.

There are money managers who are levered. There are people in other businesses who are levered, who have pressures to do things because of that, that we don't have.

Okay. Thanks.

Thank you. There appears to be no further questions at this time. I would now like to turn the floor back to Bob Steers for any closing comments.

Great. Well, thank you, all, for listening in this morning, and hopefully when we speak again there'll be a little more sun shining in our markets. Thank you.

Thank you. This concludes today's conference call. You may now disconnect and have a great day.