Cohen & Steers Inc (CNS) 2009 Q1 法說會逐字稿

Welcome to the Cohen & Steers First Quarter 2009 Financial Results Conference Call. My name is Andrea, 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 and Associate General Counsel. Please go ahead, sir.

Thank you, and welcome to the Cohen & Steers First Quarter 2009 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 Factors section of our 2008 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 contains 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, as well as our Fourth Quarter 2008 Earnings Release, each of which are available on our website.

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 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'm going to just briefly mention the headline numbers, but let Matt go into detail on them. I'd like to focus my comments first on the current environment -- we certainly believe that this is a historic time for the asset management industry -- and then focus on our strategies to capitalize on the opportunities that we see unfolding today.

With regard to the headline results -- as you know, we reported a loss of $14.5 million, or $0.34 per share. However, this included an after-tax expense of approximately $0.39 per share due to other-than-temporary impairment charges recorded on available-for-sale securities, which were mainly preferred stocks. After adjusting for these items, earnings would have been $0.05 per share.

Assets under management declined 23.2% to $11.6 billion, compared to $15.1 billion in December. The decrease in assets during the quarter was mainly attributable to market depreciation of $3.4 billion.

Net flows from our institutional channel were about $400 million, and retail experienced relatively modest net outflows of $76 million. However, during the quarter, our closed-end funds needed to de-lever by approximately $400 million.

I'd like to now share our views regarding today's environment as a background for a discussion of our current corporate strategies. As I said, we believe this is a historic and defining time in the asset management industry. We've witnessed unprecedented volatility and AUM declines, which are adversely impacting asset managers, especially their investment performance and business models.

We're confident that the worst of the financial crisis is behind us, and the system, given time, will trend back to more normal functionality. However, the damage that has already been done will most certainly result in material shifts in the asset management landscape.

We're convinced that the industry is in the early stages of a consolidation, which will result in significant shifts in market shares. The primary variables affecting these shifts will be investment performance, ownership status, balance sheet strength and distribution relationships. Taken together, these factors will determine which firms gain market share and grow, versus those that will need to retrench either through new ownership or by shrinking substantially to survive.

We believe our strength in each of these categories puts us in a position to not just survive but capitalize on the current environment. And let me briefly review our strategic positioning.

As has been repeatedly cited in several sell-side reports, we continue to enjoy industry-leading relative performance across most of our longstanding investment strategies. In addition, the global long-short strategy that we've been incubating and comparing to launch for over a year has successfully delivered strong, positive returns throughout this most challenging market environment.

Turning to assets under management and distribution -- due to the historic decline in securities valuations, especially REITs over the past year, our assets under management have suffered, along with everyone else's. That said, we remain confident that given our strong relative investment performance and important asset classes, we expect our sales and marketing teams will drive strong, organic growth as our markets recover.

Since going public over four years ago, we've built world-class institutional sales, consultant relations and client service teams that have developed client, consultant and distribution relationships in virtually every important market around the world.

Our domestic retail sales and key accounts teams have also levered our high-quality product set to successfully gain access to the most important wirehouse programs, including the new SMA and UMA platforms, where we're already experiencing significant growth.

Lastly, as most of you know, employees own over 60% of the equity of Cohen & Steers. And perhaps more importantly, our balance sheet remains debt-free and cash-rich. Our ownership and balance sheet strength means that we can control our own destiny and manage the Company in a way that will maximize our long-term growth potential, rather than impairing our proven investment in asset-gathering franchise simply to maximize short-term profitability.

Jack Welch recently criticized corporate managers for their short-term thinking and suggested that instead companies should focus on three things -- clients, product quality and employees. That has been and will continue to be our philosophy as well.

Our current strategy is focused on reducing controllable expenses as much as possible, while preserving and growing our global teams and infrastructure. That means working hard to keep our investment teams around the globe intact and focused on performance. The same is true for institutional and retail sales, client service and account administration.

In addition, we're now moving forward on two strategically important product launches -- our global long-short fund, and our private real estate global fund of funds, which will invest alongside best-in-class managers looking to capitalize on the distress unfolding in real estate markets around the world.

In the short run, the cost of our approach will be a higher compensation ratio and lower profits. However, we see this as a timely investment in our future growth. In fact, we're encouraged that we're already seeing substantial and tangible results.

Our Institutional group had an excellent quarter, adding over $1.3 billion in assets for commitment from both current and new relationships. As I mentioned at the outset, our existing clients added approximately $400 million in net new assets during the quarter, but have also committed to contributing an additional $520 million over the next several quarters.

Notably, a meaningful portion of these net flows represents market share gains due to manager terminations. In addition to positive flows from existing clients, we added six new relationships, representing $425 million of assets scheduled to be funded in the second quarter. And the majority of the new client flows are going into our large cap value strategy.

Although sales levels from our retail channel remain muted, excluding closed-end fund de-levering and including our growing UMA and SMA business, our net flows in the first quarter were basically breakeven. We're encouraged by this improving trend and are hopeful that with better market conditions, retail flows will turn meaningfully positive this year.

Lastly, motivated by the dual prospect of strong investment returns and the opportunity to jumpstart the listed real estate sector, Cohen & Steers committed to initiate and be the lead investor in equity and debt recaps for the top US REITs. Beginning late last year, it became clear that recapping these companies would reduce or eliminate concerns related strictly to financial risk, and secondly send a very strong signal that for these and other major REITs, there would be access to sufficient liquidity to be financially secure.

Furthermore, for these companies, unlike most private real estate investors, the impending surge of distress selling will be an opportunity which will allow them to recover and grow well before the real estate market itself.

Let me briefly summarize our success to date. Since March 20th, we invested in 10 equity recaps, seven of which we initiated and were the cornerstone investor. These 10 companies raised approximately $5 billion of equity, and we've been in the aggregate the largest investor, committing over $800 million on behalf of our investors, or roughly 16% of the total.

Most importantly, since the initial transaction last month, the REIT indices are up over 35%, and our average excess return from these investments has been 1,700 basis points. We believe that by helping to pry open the liquidity window for the listed real estate sector, the market has begun to reevaluate the risk and growth profile of this important asset class. We also believe that our strong global franchise is what allows us to execute unique investment strategies such as this, and deliver real value-added for our clients.

With that, I'm going to pass the podium over to Matt to go into the numbers.

Thanks, Bob, and good morning, everybody. Thanks for joining us this morning.

As a reminder, we've eliminated our investment banking segment and now focus exclusively on asset management. Until we finalize the sale of our investment banking broker dealer to an entity owned by the principals of the Business, which we expect will occur before the end of the second quarter, any results associated with investment banking activity will be reflected in discontinued operations. The results I will be speaking about today relate to our core asset management business, which is reflected in continuing operations.

I would also like to point out that we have added a few new schedules and disclosures to the First Quarter Earnings Release that we believe provide additional useful information on our business. The added information includes average assets, investment categories underlying our assets under management, and other fee-earning assets which generate fees that are recorded in the portfolio consulting and other line on the statement of operations.

Yesterday, we reported a net loss of $0.34 per share, compared with earnings of $0.33 per share in the prior year and a loss of $0.05 per share sequentially. The first quarter of 2009 includes a $0.39-per-share after-tax expense associated with losses recorded on available-for-sale securities. After adjusting for this item, earnings per share were $0.05.

The fourth quarter of 2008 included a $0.06-per-share after-tax expense related to impairment charges on previously acquired intangible assets and a $0.03-per-share after-tax expense attributable to severance and other employee-related costs. After adjusting for these items, earnings per share for the fourth quarter were $0.04.

We reported revenue for the quarter of $23.5 million, compared with $53.6 million in the prior year and $28.9 million sequentially. The decline in revenue is attributable to lower average assets, resulting primarily from market depreciation. Average assets for the quarter were $12.7 billion, compared with $28.5 billion in the prior year and $15.7 billion sequentially.

Our effective fee rate for the quarter was 66.5 basis points, which is in line with the fourth quarter. Pretax loss for the quarter was $16.2 million, compared with pretax income of $22.1 million in the prior year and pretax loss of $2.9 million sequentially. The first quarter of 2009 includes a charge of $18.2 million for losses on available-for-sale securities.

The fourth quarter of 2008 included impairment charges of $4 million, and severance and other employee-related costs of $1.9 million. After adjusting for these items, pretax income was $2 million for the first quarter of 2009 and $2.9 million for the fourth quarter of 2008.

As Bob mentioned, our strategy is focused on keeping our investment performance and asset-gathering capabilities intact. We recognize that the execution of this strategy will result in a higher compensation-to-revenue ratio and lower profits, which is reflected in our pretax profit margin of 8.5% for the quarter. The pretax margin excludes available-for-sale loss.

Now, reviewing assets under management -- headwinds continued into the first quarter, as our assets under management decreased to $11.6 billion from $15.1 billion at December 31st. Market depreciation of $3.4 billion accounted for most of the asset decline.

At March 31st, US REIT common stocks comprised 39% of the total assets we manage, followed by international REIT common stocks at 27%, preferreds at 10%, Large Cap Value at 9% and utilities and listed infrastructure at 8%.

Assets under management in our closed-end mutual funds totaled $3 billion at March 31st, a decrease of $1.2 billion or 29% from the fourth quarter. The decrease in assets under management was the result of market depreciation of $854 million and de-levering of $395 million. The majority of the de-levering was related to the redemption of auction market-preferred securities from certain of our closed-end mutual funds. So far this month, we have re-levered over half of the $395 million. As of March 31st, we have approximately $923 million of auction market-preferred securities outstanding.

Our open-end funds had assets under management of $3.1 billion at March 31st, a decrease of $1.2 billion or 28% from the fourth quarter. The decrease was primarily due to market depreciation.

We recorded modest net outflows of $76 million. Our international portfolios had $109 million of net outflows, while our domestic portfolios had $33 million of inflows. So far in April, we have recorded net inflows into our open-end mutual funds.

Assets under management in institutional separate accounts totaled $5.5 billion at March 31st, a decrease of $1.1 billion or 16% from the fourth quarter. The decrease was comprised of market depreciation of $1.5 billion, partially offset by net inflows of $395 million, marking the second consecutive quarter and fifth consecutive month of net inflows into institutional separate accounts. Our institutional pipeline remains full. And so far in April, we have recorded net inflows continuing this recent trend.

Moving to expenses -- on a sequential basis, and excluding the restructuring and impairment charges recorded in the fourth quarter, expenses were down about 8%. The decline was attributable to lower distribution in service fees, G&A and amortization of deferred commissions. 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 decrease in the average assets of our open-end load mutual funds.

Cost control remains a focus for everyone in the firm. The reduction of controllable expenses started in the fourth quarter helped drive the 14% sequential decline in G&A. The decline is in line with the 10%-to-15% range we provided on our last call. As a result of lower open-end mutual fund subscriptions, amortization of deferred commissions decreased from the fourth quarter.

Compensation expense was flat sequentially. As mentioned earlier, our strategy is focused on keeping our investment performance and asset-gathering capabilities intact. The execution of this strategy has resulted in a higher-than-normal compensation-to-revenue ratio, and the variable component of compensation expense for the first quarter has been greatly reduced.

Now, turning to the balance sheet -- our cash, cash equivalents, marketable securities and seed capital investments -- excluding amounts attributable to our long-short hedge fund -- totaled $144 million, compared with $167 million last quarter. The decline was primarily due to payment of bonuses and a mark-to-market decline on available-for-sale investments.

Since we are currently the majority investor in our long-short hedge fund, with a 92% ownership interest, the balance sheet in our 10-Q will reflect $36 million of assets and $8 million of liabilities related to the consolidation of the fund onto our books and records. This investment will be consolidated after we accumulate sufficient outside investors into the fund.

Our stockholders' equity was $231 million at the March 31st, compared with $245 million at December 31st. And with respect to our available-for-sale portfolio, the majority of the portfolio continues to be comprised of investment-grade preferred securities and seed capital investments in our mutual funds.

Unrealized gains and losses are generally reflected in other comprehensive income, and unrealized gains and losses from other-than-temporary impairments are recorded in the Statement of Operations. Therefore the marks on these securities have been appropriately reflected in our liquidity position and in our stockholders' equity.

Now let me briefly discuss a few items that will impact our second quarter. On our last call, we mentioned that our effective tax rate would be between 36% and 37%, but that it would vary depending upon the level of capital gains or losses that are recognized. The effective tax rate for this quarter, which includes discrete items associated primarily with a valuation allowance on deferred tax assets in connection with the loss on available-for-sale investments was 11%. We expect the effective tax rate for the second quarter to be between 36% and 37%.

With respect to compensation, and consistent with our strategy, we expect our compensation expense to remain about the same for the second quarter. And we expect G&A will be about $7 million.

Finally, although the results are not predictable, please bear in mind that realized gains and losses will continue to fluctuate as a result of transactions in our available-for-sale portfolios and our global real estate long-short fund.

Now we'll turn it back to the operator for questions.

(OPERATOR INSTRUCTIONS) Cynthia Mayer.

If you could walk us just through the calculation of the $0.05 -- given that the operating income was basically flat, were there gains, then, below the line?

Yes. We had some gains in our long-short hedge fund, which we're consolidating. And on a year-to-date -- we've had that noise on that line item since it's been seeded. And that accounts for the difference. There's about $0.02 in that line item that's from the hedge fund. So $0.05 is including the profit of the hedge fund, which we don't consider to be an anomaly. But if you were to exclude that, we'd still be at $0.03.

Okay. And where does the rest of that come from? Because operating income was --

Well, there's other -- there's some other --

-- basically flat.

Yes, there's some other gains on that line item, other than the hedge fund. But the hedge fund was the main driver.

Okay. And for tax rate, you're using a normalized tax rate, or --

Well, it's 11% now, because I have a capital gain loss that we can't apply. But we think for the second quarter, the 36% to 37% will hold true, assuming no other capital gain losses -- gains or losses in the second quarter.

Okay.

And then, on comp -- you talked about additional comp expenses associated with [their] new initiatives. That's in the flat comp you're talking about?

Yes. We're not really projecting at this point any meaningful additions to our headcount. So these new initiatives will be able to be executed with the team we have in place.

Okay.

And then, on the recaps -- I just wonder if you see any risk in leading the recaps, by going in basically with both feet. Do you feel at all, if you somehow change your mind about the fundamentals of the investments, would you feel -- would you be able to sell those? Or would it somehow pressure the share price?

Cynthia, this is Joe. Keep in mind, these are being executed through our client portfolios, which have mandates to be fully invested in the REIT equity markets. Our approach to these recapitalizations are to provide equity to these companies to provide solutions to their balance sheet issues. Of course, you can't create 100% uncertainty; however, we believe that the equity that we and others are providing will be sufficient to get these companies through the year 2012.

So we think that's a very long time horizon. We're confident that by that time, the equity markets -- other capital markets will have improved. So we're extremely excited about these opportunities and the position of these companies, once we execute these transactions.

Cynthia, also, thus far, all of the investments we've made have been in equity securities that are free to trade.

Right. Right, okay. Do you see more of those ahead?

Yes.

Yes.

How far the way through the process would you say we are?

In rough numbers -- and again, this is a moving target, depending on how the capital markets open up -- but to de-lever the US REIT sector to levels that we think are sustainable -- let's say it takes $40 billion to $50 billion of equity capital -- in one month's time, there's been about $10 billion that's been raised. So that's a pretty significant bite out of the apple. Now, of course, that's just the US. We think there's other opportunity outside of the US.

Let me also point out that if we have seen the lows in these stocks -- and we're gaining confidence that that's the fact -- as we think through the next return cycle for REITs, I break it down into three phases.

And phase one is the re-equitization of the sector. There's going to be a phase two that we believe will be very dynamic and exciting from an investment perspective. And that phase is for our universe of companies to acquire assets from the private market, who has their own leverage issues.

And we know -- because of what the debt maturity schedule looks like in the real estate industry and what the capital structure of those assets is -- that there will be forced selling. And based on our experience through the early to mid-'90s, we believe that the public market will provide the capital to our universe of companies to take advantage of those opportunities to acquire from distress sellers.

And that will be a global opportunity as well.

That will be a global opportunity.

Just to finalize -- the third phase, which would be the phase where the economy is turned up, and then we start to see the recovery in core fundamentals, occupancies and rents, for the various property types.

Okay.

And I guess, just to circle back -- the ones you've participated in so far -- has that in any way changed the composition of your portfolio, in terms of making certain positions more concentrated? Or is it basically the same?

Well, sure, it changes the composition of the portfolio. That's what we do as active managers -- go to where the best relative value is. I'd say, if you looked at it by property sector, the opportunities are being driven less by that, and more by where the balance sheet distress is. And so it's a company-specific investment program.

Okay. Thanks.

(OPERATOR INSTRUCTIONS) Marc Irizarry, Goldman Sachs.

Great, thanks.

Can you just give us the year-end headcount numbers versus quarter-end, and then what changes were made in the quarter?

Well, headcount at year end was about 200, and it's about 200 now. So there was really no significant changes during the quarter, from that respect. And that's why we're saying, on a go-forward basis, that we're not foreseeing any headcount adds -- that the comp for the second quarter would be about the same as it was in the first quarter.

Okay.

And then, can you talk a little bit about some of the new products here that you're launching, to take advantage of the distressed environment? You mentioned the fund of funds product. Can you give us a sense of what the investor appetite looks like for that?

I'm not sure -- we're just in the initial phase of marketing, and meeting with mainly institutions and consultants. So we had -- originally, when we brought this team on, and built the business plan, our initial thinking was to start marketing last September. We put that on hold due to market conditions. However, we have -- both on the REIT side and on the real estate fund of funds side, there is a very significant, I would say, almost an explosion of interest, academic interest, in talking to us about what's going on in the real estate sector, both public and private. And let's talk about some strategies to capitalize on what's going on beyond REITs, long-short strategies, real estate CREP debt and credit strategies. And it's not a difficult concept for people to get excited about, to think in terms of a portfolio of -- global portfolio of best-in-class managers who have a track record of success in opportunistic and distress investing.

So there's a lot of talking going on. And we'll know by the end of the summer how that translates into real financial interest.

We also are seeing good interest in our listed infrastructure strategies, as every day, you're hearing about stimulus and other programs designed to -- around building additional infrastructure, states talking about selling infrastructure and so on. So we're seeing good interest there as well.

Okay.

Then you talked about large cap value in terms of some of the funding opportunities there. Are you seeing any -- and I guess you've got a decent-size pipeline of fundings -- but is the RFP activity there -- is it sort of tracking much better than you would have thought at this point? Or you still think there's a way to go in terms of getting that product in front of institutions?

It's tracking probably stronger than we thought. We had initially felt that it would take two to three years after Rick Helm and his team joined us before we got significant traction in the institutional marketplace. And right on cue, about six or 12 months ago, that began. And it is accelerating, and it is -- the levels are very high, driven mainly, right now, by market share gains. There are many institutions who are giving up on their former large cap value managers and are reallocating that money. And we're the beneficiary of that.

That's why we said in our remarks that we see, on a lot of different levels -- whether it's just winning business, or looking at the flow of M&A activity -- that market share shifts are going to be the story of the industry the next few years. And we see that as our greatest opportunity.

With that in mind, and given the success, early success, of large cap value, what's your own outlook for M&A, or for lifting in some new groups?

We're in -- this is Marty -- we're in the flow of what's out there. And we certainly would not be averse, and we're looking at all opportunities. But we have a very high bar. And that is, we would want either a firm or a group with a very good track record, with assets that they bring [with] us and with good accretion to our earnings.

So far, what we've seen is, I guess -- I don't want to risk using this word, but castaways. There are a lot of unhappy managers or subsidiaries that might be on the market, or subsidiaries or financial companies, which -- they're interesting to look at, but they wouldn't be really attractive opportunities for us.

But as the year goes on, we're -- we expect that to happen. Bob mentioned a consolidation in the industry that's taking place, and we're firm believers in that. And to the extent that we can benefit from it, we will do so.

Hey, great, thanks.

There are no further -- actually, yes. Cynthia Mayer, Bank of America.

-- up on that last question. Just wondering if you see more opportunities in the US or overseas, and would you be interested in acquiring overseas again?

We definitely look -- we are a global organization. We have three offices outside the US and Europe, in London and in Hong Kong. So we're not at all averse to looking at international. We've got the infrastructure pretty much to accommodate anything. But we're -- and we're actually desirous of the international platform.

But it sounds like recently, you've been looking -- more of what you've been looking at has been in the US, whether or not it's what you actually want.

Right, but there are some -- there are groups that are associated with US financial institutions that are domiciled elsewhere. It really -- it's really -- it's a global opportunity, perhaps.

Okay. Thank you.

Phil Wilhelm, UBS O'Connor.

Hi. Good morning.

What -- I have two questions. One is, what makes you comfortable that -- you mentioned in the call that you believe REITs have seen a bottom. What makes you comfortable with that statement?

And then the second question is -- just going to kind of elaborate on that -- what themes are you seeing that support that? And two, how many more of these recap transactions do you foresee in the REIT space? Obviously, a number of them have gone very well. And it appears that there's continued appetite for them. So if you could just touch on those two issues, that would be much appreciated.

I'm comment on the first, and then Joe can elaborate a little bit more on the recap thing.

But we're really not comfortable discussing our short-term thinking on market movements, and why. That's what we get paid to do for our clients. So I'm not going to answer your question as to what gives us confidence, as to why REITs have bottomed. We feel pretty confident in that. But we'll let you draw your own conclusions on that.

But Joe, why don't you comment on the recap question?

Well, sure.

As I mentioned earlier, there's probably $30 billion US in equity that still needs to be raised over a couple-year period. So that's still a lot of capital relative to the size of the universe, and there's over 100 REITs. So say 15 of them have raised equity already. So there's going to be a lot of activity.

We believe that these share prices have overshot on the downside to discount this financial risk. So as these balance sheet issues are solved, the stocks have performed. And that's what has attracted investors to the area.

So there's no assurance that this is going to continue. If share prices rise to the point where they -- the stocks reflect the opportunity to recap, it's going to get tougher for these deals to be done. But we think as long as they're done right, and we've got a very specific formula for how they should be done, the market will -- there's a lot of capital out there that can absorb this equity.

It's not all the flood of equity, as well. There are also asset sales, extensions and refinancing of debt that are taking place. So I wouldn't project that -- a flood of equity coming out in the near term. Over the next few years, it might -- there'll be clearly more. But there's lots of levers that REITs have to run their business that a lot of private investors don't have. And they're using them today.

Okay, thank you.

There are no further questions at this time. Please continue.

Great. Well, thank you all for joining us this morning. And we look forward to speaking to you in July.

Thank you.

Thank you.

This concludes today's Conference Call. You may now disconnect.