Cohen & Steers Inc (CNS) 2009 Q2 法說會逐字稿

Welcome to the Cohen & Steers second quarter 2009 financial results conference call. At this time, you are in a listen-only mode. After today's remarks, there will be a question-and-answer session. (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 second 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 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 that 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, which is available on our website.

Finally, this presentation may contain information with respect to the 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 these funds, including charges, expenses, and risks, please call 1-800-330-7348 for a prospectus.

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

Thank you, Sal, and thank you all for joining us this morning. First, let me talk about the numbers, and then get into our assets, and our flows and our strategy.

The results this quarter were a little complicated by a number of factors, so I'll be brief, but I'm going to let Matt elaborate on them in a few minutes.

Last night, we reported a quarterly loss of $6.4 million or $0.15 a share. This compares to a profit of $0.33 per share in last year's second quarter.

Backing out an after-tax charge of $0.30 per share for the impairment of available for sale securities, primarily preferred stocks, we earned $0.15 per share in the quarter. However, if you back out from that, gains from other investments, primarily our long/short fund, our operating income was $423,000 or about $0.01 a share. This is a number that we have managed and are most focused on, since it's the purest measure of how our asset management business is doing.

So, when you add that up and we look at that, we're basically slightly above breakeven in the second quarter and year-to-date; but there are some further quirks that Matt will talk about. Essentially, in the first quarter, when we finished the quarter at below $12 billion, we made very modest assumptions with respect to incentive compensation for the year.

As the market improved in the second quarter and our assets increased, we needed to adopt a more realistic view towards compensation for 2009, so our second quarter results include a catch-up in compensation from the first quarter as well. But let me let -- I'll let Matt go through the details on that.

With respect to assets and flows, in the second quarter, we experienced a very welcome and strong reversal of the trends that were in place in the prior six months. Our June 30 assets under management of $16.3 billion represents an increase of 40% over the first quarter.

As you are probably aware, the REIT market has performed very well since the March bottomed, as have other sectors of the market that we invest in. But think about REITs alone in that quarter alone, US REITs were up 30%, delivering their best quarterly return after.

We're very pleased with our net inflows of $1.4 billion in the quarter. The primary source was institutional separate accounts, which had net inflows of nearly $800 million. We added eight new accounts in the quarter and lost none.

Consistent with the reversal of market trends, we were able to add leverage to our closed-end funds. Whereas the downward spiral of share prices forced us to continually deleverage through out the fourth quarter of 2008 and the first quarter of 2009, the strong rebound enabled us to increase assets by $448 million, as we nearly maintained our prescribed leverage ratios.

I should mention that we announced a proposed merger of our leveraged REIT funds and utility funds at the end of the second quarter. And concurrent with that, we have now redeemed the remainder of those funds auction market preferred shares. We replaced those with bank lines carrying attractive interest rates, so we're basically out of the auction market entirely.

Open-end net inflows of $151 million in the quarter were our highest in two years, and these inflows were primarily into our US REIT funds. Importantly, there have been two trends that have persisted since quarter end.

Institutional flows have continued very strong. In addition to the $800 million in new money in the second quarter, we have nearly $1 billion in new accounts awarded to us in the third quarter. The majority of these have already funded already in July. And further, we're candidates for a number of sizable, high-profile mandates as well as a few smaller accounts. So our pipeline remains very full.

Notably, while most of the second quarter flows were large-cap value mandates, in the third quarter, they are primarily US and global real estate. Also, since the end of the second quarter, open-end net inflows have continued on nearly a daily basis and across all of our major strategies, but particularly, into our real estate funds. This has been the case in all of our multiple channels and platforms.

Let me digress for a moment and tell you how we view the real estate or REIT market. I think it's clear -- I think it's important to understand where we are situated as a company.

It's very clear that real estate as an asset class has been totally repriced. As usual, the public market, REITs and traded debt, figured this out very, very quickly. The ongoing repercussions, however, are just beginning to be felt in the private equity and the private debt markets, such as bank loans.

This is a much slower moving train. However, this presents an enormous opportunity for those with capital, like the top-quality REITs, to take advantage of the asset value markdown that has already taken place.

That is why recapitalizing the industry, which we were the leaders of in the first half of the year, was so critical. It is also why capital has begun to flow into both our institutional and individual channels. We think that this is something that will continue, and there's no reason why it should not, if history repeats itself.

Further, the strength of our platform, our leadership in this industry, I think makes us the go-to guys with respect to -- when allocations are made, where those go.

Our major initiative over the past couple of years has been to maintain a strong consultant relations and key accounts efforts. This today is paying off for us big time. The high-quality platforms on which Cohen & Steers funds are offered are numerous and growing all the time. And they're not just in Europe -- I'm sorry -- they're not just in the US, but in Europe, Asia, and Australia as well.

The traditional asset management model is evolving at a very rapid pace, and we are effectively keeping up with these changing trends.

Our commitment to maintaining our strong platform during the most severe downturn in our history has been very successful. Our strong capital-raising and investment performance in the second quarter and thereafter have validated this strategy. In addition, I have to mention that, while it is often overlooked, we have maintained excellent client relations and an excellent record of client retention.

It appears to us that whereas many individuals and institutional investors chose to hold off on major investments and allocation decisions in the fourth quarter of last year and the first quarter of 2009, the recent relative calm in the marketplace and modestly improving economic statistics have encouraged many to resume making commitments. Our strong organization, financial position, transparency, in addition to, of course, our strong record of performance, are enabling us to increase our market share in everything that we do.

Finally, as we've mentioned in the past, Bob and I have continued to spend a great deal of time investigating opportunities to expand our platform. While we have nothing tangible to report, it does continue to seem logical to us that opportunities should present themselves as our industry undergoes significant change. The key, of course, will be finding a situation that meets our high quality requirements.

In the meantime, even without any external growth, we believe that we are well-positioned to resume our internal growth in all of our investment strategies and platforms.

And with that, I'd like to ask Matt now to walk you through the details of the quarter.

Thanks, Marty. Good morning, everyone.

Yesterday, we recorded a net loss of $0.15 per share compared with earnings of $0.33 per share in the prior year, and a loss of $0.34 per share sequentially. Second quarter of 2009 includes a $0.30 per share after-tax expense associated with losses recorded on available-for-sale securities. After adjusting for this item, earnings-per-share were $0.15.

The first quarter of 2009 included a $0.39 per share after-tax expense for impairment charges taken on available-for-sale securities. After adjusting for this item, earnings-per-share for the first quarter of 2009 were $0.05.

We reported revenue for the quarter of $26.4 million, compared with $54.4 million in the prior year, and $23.5 million sequentially. The decline in revenue from the prior year is attributable to lower average assets, resulting primarily from market depreciation and closed end fund deleveraging. Average assets for the quarter were $14.6 billion compared with $29.2 billion in the prior year, and $12.7 billion sequentially.

Our effective C rate for the quarter was 66.5 basis points, which is in line with the first quarter. Pretax loss for the quarter was $4.9 million compared with pretax income of $22.7 million in the prior year, and pretax loss of $16.2 million sequentially.

The second quarter of 2009 includes a charge of $14 million for losses on available-for-sale securities. After adjusting for this, pretax income for the second quarter was $9.1 million. The first quarter of 2009 included an $18.2 million charge for losses on available-for-sale securities. And after adjusting for this item, pretax income for the first quarter was $2 million.

Our strategy continues to be focused on keeping our investment performance and asset gathering capabilities intact, recognizing that the execution of this strategy may result in higher compensation to revenue ratio and lower profits in the short-term. That said, we are beginning to see this strategy pay off, as we recorded net inflows into open-end mutual funds for the first time since the second quarter of 2007, and recorded our highest amount of net inflows into institutional separate accounts in two years.

Excluding the $14 million available-for-sale charge and adjusting for the $505,000 redeemable controlling interest, our pretax margin for the second quarter was 32.6%. If we also exclude the $6.5 million hedge fund gain, and $1.3 million representing that portion of the catch-up adjustment to incentive compensation related to the first quarter, our pretax margin was 12.9%.

Now let's review the changes in assets under management. Assisted by the best-quarter-ever for REIT returns, our assets under management increased to $16.3 billion from $11.6 billion at March 31. Market appreciation of $3.3 billion and net inflows of $1.4 billion accounted for the increase in assets. This quarter marks the first time since the third quarter of 2007 that we reported both net inflows and market depreciation.

At June 30, US REIT common stocks comprised 40% of the total assets we manage, followed by international REIT common stocks at 27%; large-cap value at 11%; preferreds at 10%; and listed infrastructure and utilities at 7%.

Our open-end funds had assets under management of $4.2 billion at June 30, an increased of $1.1 billion or 37% from the first quarter. The increase was due to market appreciation of $975 million and net inflows of $161 million.

Domestic REIT portfolios had $172 million of net inflows, while its national portfolios had $11 million of net outflows, $37 million of which came from our International Realty Fund. So far in July, we have continued to record net inflows into open-end mutual funds. Our organic growth rate for open-end funds was 21%, if you annualize second-quarter flows.

Assets under management in our closed-end mutual funds totaled $4.2 billion at June 30, an increase of $1.2 billion or 39% from the first quarter. The increase was the result of market appreciation of $736 million, and releveraging of $448 million. The releveraging, which was achieved through a drawdown of the funds' credit facilities, was the result of market appreciation and not a change in the funds' target leverage ratio.

I'm sure most of you have seen the press releases we issued on June 30, announcing our intention to redeem the remaining outstanding auction market preferred securities and our closed-end funds, and our intention to merge four of our closed-end funds.

With respect to the redemptions, we expect that we will have redeemed the remaining $923 million of AMPS by the end of this week. The AMP redemptions, which will be made through the funds' credit facilities, will have no affect on our AUM, or Associated Fee Income.

Since we intend to maintain the funds' target leverage ratio, AUM will likely fluctuate going forward, based upon market conditions. Similarly, the closed-end fund mergers, which require shareholder approval, should be completed by year-end, and will have no affect on AUM or Associated Fee Income. The fund assets will be consolidated, and fee waivers will continue to burn off as scheduled.

Assets under management in our institutional separate accounts totaled $7.9 billion at June 30, an increase of $2.4 billion or 44% from the first quarter. The increase was comprised of market appreciation of $1.6 billion and net inflows of $782 million, marking the third consecutive quarter of net inflows into institutional separate accounts.

Our organic growth rate for institutional separate accounts was 57%, if you annualize second quarter flows.

Moving to expenses. On a sequential basis, expenses were up about 11%. The increase was attributable to higher employee compensation. Employee compensation increased 23% from the first quarter, due to a catch-up adjustment to incentive compensation. The catch-up adjustment better aligns our year-to-date incentive accrual with the year-over-year variance in average assets under management.

Now turning to the balance sheet. Our cash, cash equivalents, marketable securities, and C capital investments, excluding amounts attributable to our hedge fund -- or investment in hedge fund, totaled $163 million, compared with $144 million last quarter. The increase is primarily due to mark-to-market increases in our available-for-sale investments.

Since we are currently the majority investor in our global real estate long/short fund, the balance sheet in our 10-Q will reflect approximately $49 million of assets and $14 million of liabilities related to the consolidation of the funds onto our books and records. This investment will be de-consolidated when our economic interest falls below 50%. Stockholders equity was $253 million compared with $231 million at March 31.

With respect to our available-for-sale portfolio, the majority of the portfolio continues to be comprised of investment-grade preferred securities and C capital investments in our mutual funds. Unrealized gains and losses are generally reflected in other comprehensive income. 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 stockholders equity.

In addition, we have enhanced our criteria for assessing other-than-temporary impairments to include a more precise duration standard. The impairment expense taken during the quarter is primarily due to this enhancement.

We have now recorded meaningful impairment losses in three out of the last four quarters. After taking a charge in this quarter, except for a relatively small portion, all of our available-for-sale investments have been other-than-temporarily impaired. This means that only subsequent market declines will hit the income statement with subsequent recoveries recorded through other comprehensive income.

Now let's briefly discuss a few items that will impact our second half results. The effective tax rate for the quarter was 26%. In computing the effective tax rate, the impairment charge on available-for-sale securities and the associated tax benefit are excluded as discrete items. In addition, the second quarter includes an adjustment to bring the first quarter in line with our revised annual estimate.

Based on our annual projections, we estimate our effective tax rate to be 21% in each of the third and fourth quarters. When we project our effective tax rate, we include an estimate for capital gains and we exclude discrete items.

We estimate compensation expense will be between $13.5 million and $14 million in each of the third and fourth quarters. That said, the estimate may change, based upon market conditions.

We expect G&A to remain in line with the first two quarters. And finally, although results are not predictable, please keep 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.

Before opening it up for questions, given the level of activity this quarter, I thought it would be useful to provide a brief summary of the major takeaways.

After taking the $14 million charge on our available-for-sale securities this quarter, except for a relatively small portion, all of our holdings have now been other-than-temporarily impaired. Excluding the impairment charge, we earned $0.15 per share. That $0.15 per share is made up of $0.01 per share from operating income; $0.04 per share from nonoperating income; and $0.10 per share from the hedge fund gains.

Operating income includes a $0.04 cumulative catch-up to incentive compensation. Our effective tax rate was 26% for the second quarter of '09, and is expected to be 21% in the third and fourth quarters. The lower tax rate is due to the amplified effect of capital gains and other permanent differences on a lower-than-usual pre-tax base.

We recorded net inflows and market appreciation for the first time since the third quarter of 2007. Our annualized organic growth rate for open-end funds and institutional separate accounts was 21% and 57%, respectively. And net inflows have continued into July for both open-end and institutional separate accounts. With respect to institutional flows, almost $1 billion of mandates have been awarded so far for the third quarter, of which almost half have already funded.

With that, I'd like to open it up for questions. Operator?

(Operator Instructions). Mike Carrier, Deutsche Bank.

First, a question for Marty and Bob. I think the real estate industry right now, just a lot going on and a lot of different views out there in terms of where we're headed, particularly on the CMBS or at least the commercial real estate side. So, I guess, just given your outlook, and it definitely seems like, at least on the institutional side, investors are looking as if this is somewhat close to a bottom, and you want to be getting in because there's new opportunities there.

But I guess, when you view it from the REIT perspective, how does that differ from maybe the CMBS market, when you look at either those that are holding the loans, the securities, the financing needs, and then that versus kind of the macro outlook and things starting to improve. And then anything that the government has done, like the TALF, if that can help in terms of the funding.

Well, it's hard to give you a concise answer, Mike, because nearly a -- barely a day goes by that you don't read about all of the issues in the commercial real estate market. Many of them are real, but I will tell you that I think most of them are perceptions, rather than reality. And I try to be concise in my remarks.

Essentially, it's a slow-moving train. It's a slow-moving train with respect to rents rolling down as vacancies increase slowly. And it's a slow-moving train as those owners of equity in real state or lenders start to realize the markdown in value that is taking place.

So how does this intersect -- how does this adversely or -- how does this affect REITs?

On the one hand, (technical difficulty) there's a decline in cash flows, because they're suffering from the same fundamental problems that the real estate industry is. They're suffering from a markdown in value because of the industry. But I will tell you that the stock market is ever brilliant in this, and that's why REITs were down 75% from their high. There's still down [60%] from their high. And all of the analysts have adjusted their estimates to reflect the cash flow declines that are expected over the next year or two.

It has been our contention that those companies that are best positioned are the ones that are going to take advantage of a buying opportunity that we have not seen in 20 years. And every public real estate management team complained in the 2004/'05/'06/'07 period that they couldn't buy anything because they were being outbid by every private real estate operator that had access to low-cost debt -- just the opposite; they're the bidders now, and they are the ones that are going to accumulate portfolios.

We saw this in the 1990s. No one believed how -- or people couldn't really appreciate or understand how REITs could generate earnings per share growth in a period in the '90s that the direct real estate market was still suffering from rolldown in rents and fire sale prices; but the exact same situation is unfolding today.

So you're going to read headlines and you're going to hear a lot of people saying, I don't get it, I don't see how this can (technical difficulty) -- how REITs can do well and how you can have confidence in owning these; but I can tell you that the institutional market has picked this up big time. And you're seeing every major large institution saying now is the time to come in. And I think they're right.

Why wouldn't you be a buyer at 60% off in an industry that is buying property at 60% off? And that's what they're seeing. And as I also mentioned, our platform and our presence and prominence in this industry, and our financial strength and stability, has made us, in the asset management business, very uniquely positioned with respect to asset gathering. So that's what we're seeing on the institutional side and we're seeing start to happen, though, to a smaller extent, on the individual side -- retail and registered investment advisors and the like.

Okay, thanks. And then, Matt, thanks for that color just on the noise in the quarter and the outlook on the expenses. Tough to (technical difficulty) the expenses when your assets go up 40% in a quarter.

But if you look at some of the consolidation in the closed-end funds, I guess, any expense saved on that end?

And then just on the nonoperating side, if you can just give us what the balances are for some of the stuff that will create a noise to the available-for-sale securities, both in terms of preferreds and then also just what you have in terms of seed investments in the long/short fund.

Mike, if I could just mention on the merger of the funds, we don't expect any material change in our expenses with respect to operating those funds. There might be some modest, but it's not something -- it's not the motivation here.

The motivation to merge these funds was essentially because they had shrunken in size to an extent that we felt that the shareholders were better served. And in fact, we could reduce the expenses from the shareholder's standpoint and we'll demonstrate that in the filings that we make. So it was strictly motivated just as an expense savings to improve efficiency for the shareholders in these funds.

But on the other half, (inaudible) I'll have Matt handle that.

So, on the -- I guess starting in the points, when we talked about our margins that with the hedge fund gains in nonoperatings about $6 million. And we have about a little over $0.02 of a gain in seed money investments, which in the ordinary course, we have taken in the past, realized gains in our seed money.

The realized gain loss line has been clouded lately because of the impairments. And up until this quarter, all the impairments that we had taken were because of fundamentals relative to the underlying issuer, and the arduous process that we go through weekly in assessing the portfolio.

I think now that we've implemented a more precise standard for duration, which is an enhancement to what we have already been doing on the portfolio, there's going to (technical difficulty) the primary driver behind the $14 million of charges that we've taken right now.

And then as far as go forward, virtually all of our portfolio has been temporarily impaired. There's a small amount that hasn't been temporarily impaired because both the criteria that we apply other than duration-based, there's no issue with the underlying.

The majority, quite frankly, of the securities that we have that we have not impaired have been AMPS, that we've invested in that are still paying interest. And fair value, we have to take a charge on them. And our duration policy is now going to target those AMPS for potential impairment in the third quarter, but it's nowhere near the magnitude that we've seen this quarter. And the reality is that probably 35% of the AMPS holdings that we had a little over a year ago have been redeemed at par.

So although we're valuing them lower because of the market, we have every intention and we certainly have the ability to hold them until they ultimately get redeemed as well.

Okay, thanks. And then just one final one on the flows, particularly on the institutional side. You kind of mentioned value in the last quarter -- a lot of the new pipeline is on the real estate side. Any color in terms of, is it on the US side, international, or is it just pretty much broad-based?

Mike, hi. It's Bob Steers. It's really broad-based. I think what we've seen with every month and quarter is that the interest level and individual strategies has been broadening out. In the fourth quarter and first quarter, what we saw was very substantial -- what I would say market share gains in value, where underperforming value managers were dismissed and we were a, I think, a safe and obvious choice to replace them.

And as Marty mentioned, as investors are starting to make decisions again, we're seeing it broaden out into all of our strategies -- global REITs, US REITs, our long/short funds, and so on. So -- and then also the investors themselves are very much global.

And I want to just reiterate -- Marty mentioned our performance and our strong platform are drawing a lot of institutional attention to our firm and our strategies, but I want to reiterate that we have people and efforts in our institutional sales and consultant relations business located in the UK, Brussels, Hong Kong, Australia, in addition to here, and we manage dozens of funds for others. And we have non-US institutional funds in Europe and Australia.

So what we're seeing is institutional investors are clearly moving towards real asset strategies, which very much includes real estate and infrastructure. I think they're drawn to our ability to deliver customized portfolios in those areas.

And then lastly, and Marty alluded to it in his remarks, we believe that the gun went off starting with the equity recap of the major REITs. I think we've seen some extremely -- some of the largest pools of capital in the world who had been planning on moving into real estate, but were in no great rush late last year and early this year.

Once we were able to help the top REITs demonstrate that they could access capital and a lot of it, even with dramatic headwinds, those plans began to change. And these large institutions are accelerating their plans to move into real estate, both listed and unlisted, because as Marty mentioned, there's a huge difference between what's going on at the property level in this slow sort of train wreck that you're seeing over the next year or two, and capital being allocated. And REITs as a consistent leading indicator are a great barometer of that.

So I think our flows are a reflection of our specific products and distribution capabilities. And then there's a, we believe, a broader trend underway where the larger pools of capital we're thinking in macro terms are seeing the capital starting to form, both publicly and privately, to capitalize on the weak commercial property trends and valuations.

Marc Irizarry, Goldman Sachs.

I just want to follow on to the institutional trends and the asset allocation toward real estate and some of the capital formation. I guess there's a risk potentially of too much capital-chasing opportunities too early. Can you maybe just address as the slow-moving train sort of makes its way, there's capital forming, but where are we in the process, do you think, of some of this capital actually being deployed versus formed?

So are we in a period of where you're going to see institutions increasingly forming bigger pools of capital, yet nothing is being deployed? And maybe you can shed some light on that.

Well, I think that you hit on a few interesting issues. One is our view is that there will be more capital raised through a variety of structures and sources than most market participants expect. Obviously, I think most of you were taken by surprise at our institutional flows.

In addition, as some of you may know, there are private funds being raised. There are many filings for potential mortgage REITs in the pipeline, maybe a dozen or more. And of course, there are the well-publicized government programs which are going to be available for these and other investors.

So I think in contrast to even a few months ago, what the market is seeing is public companies, private companies, investors, sovereign funds, are very rapidly designating, raising capital to capitalize on what's happening here. And I think it's happening sooner and in a bigger way than most people had expected, ourselves included, frankly.

In addition, right now there's not a lot of transaction activity. It turns out that I think investors over-estimated how soon and how large the expected tsunami of real estate loans and properties would come to the market in a distressed fashion.

That's not to say that they're not out there; however, we think that banks will be triaging and extending, sort of kicking the can down the road in a larger number of their loans than investors expected. And I think at the end of the day, that the hysteria over the wave of CMBF and other loans that everyone expected to come to the market in six to 12 months, the trend is right but I think the magnitude was overblown.

So I think the bottom line is what we're starting to see this summer is that there's more money, very sophisticated and large money, that is coming into this sector. And I think the supply at extremely distressed prices of both real estate debt and equity, while very significant, may, in fact, be less than the pessimists had originally anticipated.

Great. That's very helpful. And just -- you know, I think you mentioned forming a -- and I may have missed this before -- you mentioned, last quarter, forming a distressed real estate fund. Is that -- are we seeing the commitments to that fund already in the flow numbers? Or is that something that we should expect to see in the back half?

Well, the only effort we currently have underway in that respect is our -- the real estate fund to fund team that joined us from Citibank. And they're in the market now on their first rave. And that money will be directed mainly at real estate private equity funds that focus on distressed and opportunistic investing. We're hoping to have a first close somewhere around year-end or early next year.

Okay. And then maybe can you touch on the fee rate or the realization rate for fees? Steady in the second quarter versus the first, but it looks like the mix is shifting a bit more institutional, as you bring in some of these bigger institutional mandates. Can you just speak to that's the trend there on the fee rate?

Yes, Mark. The fee rate did stay pretty consistent with the first quarter; you're right that the trend is probably going to shift a little bit. We had somewhat of a benefit in the fee rates just because the break points with our clients, as the asset levels declined, the fees actually went up. Now those asset levels are coming back, so we should be at a breakpoint where there'll be a little adjustment there. In addition, some of the monies that we have been getting in, in the large-cap value and other mandates have been at a lower rate than what's been our traditional rate.

So I think in the second half of the year, although we do have a couple of fee waivers coming due, I think that's going to be no more than offset by maybe a slight decline in our institutional fee rates. You should see that coming down a little bit in the second half of the year. It's actually a good story, because our assets will be higher and hopefully net-net, it should translate into higher revenues.

And I should just re-emphasize, it's not that we're cutting our fees or our rates are coming down, but that some of the mandates we're getting are very large. So the normal breakpoint effectuate a much lower fee level.

Okay, great. Thanks.

Cynthia Mayer, Merrill Lynch.

I wonder if you could just talk a little about what kind of acquisition opportunities you're seeing, what's appealing to you, in light of the trends you describe? I'm wondering, would you want to acquire, say, another REIT manager or do more list-outs? Or would you actually want to diversify away from real estate?

Cindy, we're looking at real estate and non-real estate opportunities. In the non-real estate area, if we did a list-out or an acquisition, it would be something that would be likely -- now, I mean, this is just on our wish list and anything could happen -- but it would be something that is a logical fit with what we do, and that is kind of a high-income equity type of strategy.

And on the real estate side, we're not necessarily interested in acquiring a REIT manager, but there might be other real estate strategies that utilize our in-house skills and our distribution. And there might be something interesting there.

I can't tell you that we're either disappointed or not about this, but it looks like -- I think I may have mentioned this in our last call -- the quality of opportunities isn't that great out there. And I think that's actually -- I think that's good for our industry, because those managers that are good are happy where they are. Those companies that are doing well are maintaining their presence. And typically, what's suddenly for sale are assets that we may not necessarily want. And in fact, I think they're finding very few want those assets. There's probably a lot for sale, but not something that would fit with us.

We could triple our assets overnight if we wanted to. Our view is that if you buy something ordinary, you become ordinary. And we don't want to fall for any of that.

Okay. And maybe also just a question on the hedge funds. It sounds as if that performance has been pretty good. Can you tell us about what kind of success you've had in attracting assets to that? And eventually, when and if it does get larger, what kind of fee structure that has?

Well, Cynthia, we just started marketing that fund a couple of months ago. We started to add some external money, some of which are some of the largest, most sophisticated hedge fund investors in the world. And so, we're optimistic that the window is now open again for funds with strong track records, which our fund, certainly, is in that category.

So, as Matt mentioned, we're still the majority investor in that fund, but we would expect that that would not be the case sometime in the not-too-distant future.

Matt, you want to comment on the fee structure?

It's an incentive fee which we would not be recording until it's earned, and then it would be a management fee of 150 basis points. As Bob said, that's probably going to be more a 2010 -- for fee income, so that's a move from nonoperating up to operating.

Great, okay. And let's see -- just a quick modeling question. How much is left in your tax loss carryforward at this point? In terms of allowing you to have investment gains without much tax on it?

I think it's about $15 million to $20 million of realized.

Okay. And --

But even on the impairments, even though we've got a reserve against it, we do -- we have a deferred. So, eventually, these will get -- eventually will be generating capital gains again, as we are with the hedge fund and as we are with our track record accounts.

And as we get realized gains, we'll be absorbing against the realized loss carryforwards. But eventually we'll be -- we're holding onto the other impaired securities, so we expect that we're going to get back a lot of the charges that we had to take as the market continues to improve.

So, it's hard to predict what the deferred benefits going to be, because we intend to hold to lessen that impact. So I think at this point, we have about $15 million of realized losses that's available for realized gains.

I see. So, you have room as it stands for $15 million [in] gains without paying much tax, but it could change.

By less, less being the $0.5 million that we've recorded so far this year, we're going to apply against that. So we've got about half of that left.

Oh, okay. So about [$7 million] left?

Yes.

Exactly.

Okay, so -- and that's behind the 21% tax rate for the third and fourth quarters?

That's right.

Okay. And then I guess, lastly, just sort of a question that's a blast from the past, but maybe just to ask -- do you see any potential for reviving closed-end funds and selling new closed-end funds, given how strong the asset class has been in the last quarter?

Well, our assumption is that the closed-end fund market is closed for the time being. They still tend to trade at a discount. The ability to -- and the desire on the part of the investors by leverage is not as great as it used to be, because they haven't had a good experience. So unless it's some kind of unique strategies that we haven't come up with, but others might, we don't see that market as being strong -- or coming back this year.

Great. Thanks a lot.

At this time, you have no further questions.

Well, thank you all for joining us today. And we look forward to speaking to you after the next quarter.

This concludes today's conference call. You may now disconnect.