Cohen & Steers Inc (CNS) 2009 Q3 法說會逐字稿

Welcome to the Cohen & Steers third quarter 2009 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions).

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

Thank you. Welcome to the Cohen & Steers third quarter 2009 earnings conference call. Joining me are Co-Chairmen 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 that we issued yesterday as well as in our previous earnings releases, each 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 Bob.

Thanks, Sal, and thank you all for dialing in this morning. We're going to change things up a little bit this time in an effort to reduce redundancies and make the call as efficient as possible, so I'm going to ask Matt Stadler to lead off and run you all through the numbers and then I'll close by making comments on some of the significant trends that we saw in the quarter.

So, Matt, take it away.

Thanks, Bob. Good morning, everybody. Yesterday we reported net income of $0.18 per share, compared with a loss of $0.02 per share in the prior year and a loss of $0.15 per share sequentially.

The 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 third quarter of 2008 included $0.24 per share of impairment charges and an associated tax expense on available-for-sale securities. After adjusting for these items, earnings per share for the third quarter of 2008 were $0.22.

We reported revenue for the quarter of $33.8 million, compared with $48.9 million in the prior year and $26.4 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 under management for the quarter were $19.5 billion, compared with $26.2 billion in the prior year and $14.6 billion sequentially.

Our effective fee rate for the quarter was approximately 63.5 basis points, down from approximately 65.5 basis points last quarter. The decline was due to lower institutional fees resulting partially from new sub-advisory mandates and partially from the triggering of break points due to higher asset levels.

Pre-tax income for the quarter was $10 million, compared with pre-tax income of $4 million in the prior year and a pre-tax loss of $4.9 million sequentially.

Impairment charges on available-for-sale securities totaled $14 million and $10.5 million in the second quarter of 2009 and the third quarter of 2008, respectively. After adjusting for these items, pre-tax income for the second quarter of 2009 and the third quarter of 2008 were $9.1 million and $14.5 million, respectively.

Our pre-tax profit margin for the third quarter was 29.6%. Our operating margin increased from 1.6% in the second quarter to 17.2% this quarter. The increase in operating margin highlights the operating leverage of our business, as revenue increased by 28.5%, but expenses only increased by about 8%.

Now, turning to assets under management. Helped by the second quarter in a row of strong REIT performance, our assets under management increased to $22.5 billion from $16.3 billion at June 30. Market appreciation of $4.4 billion and net inflows of $1.8 billion accounted for the increase in assets. This marks the second quarter in a row that we have recorded both net inflows and market appreciation.

At September 30, U.S. REIT common stocks comprised 44% of the total assets we manage, followed by international REIT common stocks at 28%, large-cap value and 10%, preferreds at 9%, and listed infrastructure and utilities as 6%.

Our open-end funds had assets under management of $5.9 billion at September 30, an increase of $1.7 billion, or 39%, from the second quarter. The increase was due to market appreciation of $1.3 billion and net inflows of $386 million. Domestic REIT portfolios had $210 million of net inflows, while international and global portfolios had $176 million of net inflows. Our organic growth rate for open-end funds was 36% if you annualized third quarter flows.

Assets under management in our closed-end mutual funds totaled $5.2 billion at September 30, an increase of $979 million, or 23%, from the second quarter. The increase was the result of market appreciation of $799 million and line-of-credit borrowings of $180 million. The draw down of the fund's credit facilities was the result of market appreciation and not a change in the fund's target leverage ratio.

During the third quarter, as previously announced, we fully redeemed all remaining outstanding auction market preferred securities in our closed-end funds. At this time, we do not anticipate any further credit borrowings to occur.

Assets under management in our institutional separate accounts totaled $11.4 billion at September 30, an increase of $3.5 billion, or 45%, from the second quarter. The increase was comprised of market appreciation of $2.3 billion and net inflows of $1.2 billion, marking the fourth consecutive quarter of net inflows into institutional separate accounts. Our organic growth rate for institutional separate accounts was 60% if you annualize third quarter flows.

Moving to expenses, sequentially, expenses were up 8%. The increase was primarily due to higher employee compensation and an increase in distribution and service fee expense. Employee compensation increased 7% from the second quarter due to a catch-up adjustment to incentive compensation.

The catch-up adjustment better aligns our year-to-date incentive accruals with the year-over-year variance in assets under management. 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 increase in the average assets of our open-end load mutual funds.

Now, turning to the balance sheet. Our cash, cash equivalents, marketable securities and seed capital investments, excluding amounts attributable to the consolidation of our global real estate long-short fund, totaled $179 million, compared with $163 million last quarter.

Based on current accounting guidance, we will continue to consolidate the global real estate long-short fund. And as a result, approximately $71 million of assets and $28 million of liabilities will continue to be included in our books and records.

Stockholders equity was $271 million, compared with $253 million at June 30.

With respect to available-for-sale portfolios, the majority of the portfolio continues to be comprised of investment-grade preferred securities and key capital investments in our mutual funds. The majority of our available-for-sale investments have been other than temporarily impaired. This means that only subsequent market declines in these securities will be recorded in the income statement. Subsequent recoveries will be recorded to other comprehensive income, a component of stockholders equity. Therefore, the marks on these securities have been appropriately reflected in our liquidity position and in our stockholders equity.

Let me briefly discuss a few items to consider for the fourth quarter. The effective tax rate for the third quarter was approximately 21%. The lower tax rate is due to the amplified effect of capital gains and other permanent differences on a lower than usual pre-tax income base. Based on our projections, we estimate our effective tax rate will remain at approximately 21% for both the fourth quarter and the full year of 2009. When we project our effective tax rate, we include an estimate for capital gains and we exclude discreet items.

We have recorded catch-up adjustments to employee compensation in each of the last two quarters in order to better align our year-to-date incentive accrual with our year-over-year variance in assets under management. Therefore, year-to-date compensation expense should be used as a basis for estimating the fourth quarter. This estimate may change, however, based upon market conditions.

We expect G&A to increase slightly in the fourth quarter as a result of increased travel. And finally, although the 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.

And I'll throw it back to Bob.

Thanks, Matt. Let me just say at the outset that given the environment that we've lived in for the last year and the trends that we're seeing currently, we feel very good about where we are as an organization and where we sit in the asset management industry with our focus on real asset strategies.

Just as a reminder, roughly a year ago we elected to preserve and even upgrade our investment and distribution infrastructure rather than manage this Company for short-term earnings. With -- the clear opportunity at that time was to capitalize on the challenging environment facing all asset managers, and what that decision did was to allow us to focus on three things -- investment performance, new products and added distribution. So, let me briefly report on those three areas.

First, investment performance is shaping up to be another exceptional year for Cohen & Steers. Let me just cite as examples our five main investment composites. First, our global real estate strategies through the end of September have generated almost 300 basis points of excess returns, generating about a 34.5% total return.

Our U.S. REIT strategies are currently 550 basis points over their benchmarks, generating just short of 23% returns. Our global listed infrastructure strategy is about 100 over its benchmark, 15.25% returns. Our corporate preferred strategy is 1,100 basis points over its benchmark, generating over 38% return year-to-date. And our global long-short strategy is currently almost 3,200 basis points over its benchmark, generating net 34.4% returns through September.

Obviously, our performance is extremely strong through the September quarter, and we expect this to have been yet another very strong year of performance for Cohen & Steers.

Turning to new products and capabilities, there too we're seeing steady progress. Given the outstanding results that I just mentioned for our global long-short strategy, not surprisingly, we're seeing very strong interest there. We were awarded three new mandates in the quarter, and we've already won over $125 million of additional mandates this month alone.

In the second quarter, we also began marketing our private real estate fund of funds. That team joined us about a year and a half ago, but their marketing efforts were put on hold for nine months given the environment. And we're now beginning to see real interest for our real estate multi-manager strategies.

And lastly, we began our initial push into the listed infrastructure area, and that has been successful. We received our first separate account in the quarter, and based on strong demands this week, we've launched our new Australian mutual fund.

The third area of focus was expanding our distribution partnerships. In the quarter, we added several additional major distribution partners, mainly via institutional sub-advisory relationships that have allowed us to access additional retail and high net worth clients, especially outside of the United States.

Today, we have over 30 such relationships, covering most of the UK and Continental Europe, Australia, New Zealand, and Japan, as well as some redundant coverage of North America.

So, the bottom line is that our financial strength and stable platform, our performance and our broad and growing distribution has led to excellent organic growth of 43% and 27% for the quarter and year to date, respectively, along with the prospect of significant operating leverage going forward.

Remarkably for this early in a recovery, all of our channels are now contributing to our growth, and demand for real asset strategy is growing rapidly.

Institutionally, we have $1.6 billion in gross inflows in the third quarter, mainly representing market share gains from managers who have platform or performance issues, unlike ourselves.

Secondarily, we're seeing flows from larger offshore institutions that still have liquidity and are looking to invest in real assets. Our pipeline remains very strong, and we've already won over $600 million of new mandates thus far in this quarter.

Turning to retail, we're encouraged by signs of continued improvement there. The $386 million of net inflows in the quarter is the best since the second quarter of '07, and those trends appear to be holding steady so far in the fourth quarter.

The RIA channel has generated the majority of these net sales, but the broker-dealer channel is beginning to show signs of life, mainly driven by our inclusion in new programs and platforms.

Finally, with respect to our alternative strategies, the long-short and fund of funds, for the first time, they are contributing to our pipeline strength and we're seeing a gradual thaw in the freeze for commitments to alternatives. We expect our global long-short assets under management to approach $200 million by year-end, and that pipeline is growing rapidly.

The fund of funds business model is developing more slowly. However, we're seeing real interest, and that interest is larger and more broad than we had originally expected.

Finally, Marty and I throughout the year have been looking at pretty much all the external growth possibilities -- acquisitions and lift-outs and so forth. However, we really haven't seen anything that would enhance the growth profile of our platform. So, while we'll continue to look at external growth opportunities, our focus will remain mainly on internal product development.

So, I'll stop there, and operator, I'd like to open it up to questions.

(Operator instructions). We'll pause for a moment to compile the Q&A roster. Your first question comes from Michael Carrier with Deutsche Bank.

Thanks, guys. One question. One, just the outlook for REITs in real estate. Obviously, they've had a good run with the market, but they're still in some pockets the market's funding issues. I'm just trying to get a sense of where you guys think we are, given the improving economic trends that we're seeing, but then also how that plays into some of the institutional activity you're seeing. You said that a lot of these flows have been market share gains, but from an allocation perspective, are you seeing any more or less interest, whether it's in the U.S. or in the non-U.S. markets, of increasing allocations to real estate or decreasing?

Well, this is Joe Harvey. Let me talk about the outlook for REITs a little bit. In a couple of our prior calls, we've stated that we believe we've entered into a new positive return cycle and it was going to break down into several phases, the first phase being the balance sheet recapitalization phase. And I'd say here we're transitioning out of that phase to the next phase.

In other words, companies worldwide have raised a lot of capital, about $50 billion U.S., this year alone. The cost of that capital has decreased materially, and now they have access to multiple types of capital, including the corporate bond market, the preferred market, etc. So, we feel really, really good about where those companies' balance sheets are.

And that's going to position them to enter the next phase, which we've stated is the acquisition phase of the cycle, the opportunity to help recapitalize the private market for real estate. It's still early in that process. It's probably 2010 business as financial institutions go through their sorting out process for the loans that they have.

I'd say our thinking has changed a little bit on how good that opportunity is going to be based on the normalization that we've seen in the credit markets and the capital that's been on the sidelines for real estate, which is starting to come out and pursue direct real estate opportunities.

We still think a lot of real estate is going to trade hands, and that's going to take place over a multi-year period, but it's probably going to happen at higher valuations or lower yields than what many had suspected at the beginning of the year.

The good news in that is that it means that the value of the companies we invest in is greater. The less so good news is that the ability to add value through acquisitions, while we believe it's going to be attractive, is not going to be perhaps as good as it was in the early 1990s.

And the third phase of the cycle is the fundamental recovery phase, and this is pretty interesting because, depending on where you go in the world, it's already happening in other places, like the U.S. or in the UK, where the economic cycle is more challenging and it's going to take a while for fundamentals to recover.

That said, in terms of the interest that we see in global real estate securities, it's been higher than we've ever seen it. We're busier than we've ever been. Bob mentioned that we've taken a lot of market share from some of our competitors.

But, there are also a lot of institutions who have been looking at the area for several years, and through the downturn, they put their searches on hold. We're seeing some of those start back up again. There are other large institutional investors globally that have not made allocations, and they're doing so now.

I'd say one trend we're seeing is -- that I think is going to favor real estate securities going forward and help them gain more market share within the real estate pie -- is the greater need for liquidity. I think many real estate investors have -- are realizing the true cost of illiquidity. Through their direct investments and clearly through listed real estate securities portfolios, they can achieve the best of both worlds -- have their real asset allocation and do so with liquidity.

If I could just add one comment to Joe's. I think what we're seeing, aside from the market share gains, those entities, particularly the very large institutional pools around the globe, that have liquidity, there is a very high focus on real asset investing. So, we're seeing strong interest not just in our local REIT strategies. We're seeing surprising -- you know, surprising even to us -- institutional interest in listed infrastructure, which is an institutional asset class, which heretofore didn't exist.

And we're also seeing it in private real estate in our fund to funds group. The idea is public or private. There is an opportunity that is here and now, and especially looming into 2010. And those who can be opportunistic are evaluating all the various strategies to be opportunistic, but particularly in real asset strategies -- you know, strategies that can legitimately be looked to to provide inflation protection. And we see that in private real estate. We see it in public real estate with a looming dividend growth story beginning late 2010, which might be more powerful than we've ever seen before in the REIT industry.

Okay, thanks. And then, one for Matt. On the long-short fund, most of that's being booked in the non-op area, and when new money moves -- or outside money moves into the product, that would be on the investment management side. But, given the accounting change, will it continue to be reported on the non-op side?

Well, when we get outside money coming in, given the performance, we'll be getting a management fee and a performance fee that'll be shown up top in revenue. Our investment or seed in the fund will continue to be mark-to-market and will continue to show up in the non-operating section.

Okay. Thanks.

(Operator instructions). Your next question comes from Marc Irizarry with Goldman Sachs.

Oh, great. Thanks. Matt, can you just tell us where headcount is today and just remind us where that was last quarter? And then, also, just in terms of your asset -- your (inaudible) level's obviously -- you know, performance is very strong, and you're flowing well, and you certainly have built the business for growth. But, how should we think about the operating leverage and the margin potential in the business? In other words, how much distribution investment have you made relative to the level of assets that you have today? And I don't know, maybe that's, Bob, a question for you.

Yeah. Well, let me take the headcount first. I mean, our headcount is pretty much in line with where it was at the end of June a year ago. It's down probably 10% to 12%. So, we've kept headcount pretty much static, down from where we were a year ago, as we announced banking and we had some other reductions, but it's been holding pretty steady.

The year-to-year reduction is primarily in banking.

Right.

A group that we separated at the end of last year.

Prospectively, as Matt mentioned, I think we have been sized and kept our size to accommodate asset levels more in line with where we are today. If the level of activity, particularly institutionally, continues, at the margin we might make some additions to sales and client service. Retail, we're sized for the foreseeable future. We wouldn't need to add anything there.

So, if we continue to experience these very strong trends, we would definitely consider making some additions, but they're not going to be that material, frankly.

Okay. And then, what about the margin over time? Is there any -- I mean, I know you're not necessarily targeting a margin, but how should we think about where the margin on this business ought to be over time?

Okay, I think the operating margin went up from a little over 1% to 17% sequentially, and to what Bob was saying, the asset growth is occurring, and the increase in expenses will be negligible relative to that. So, we didn't cut back a lot when the assets dropped dramatically, other than getting out of the segment. We're not going to really need to hire dramatically if this trend continues in asset growth. So, I think you're going to see an up-tick in the margins meaningful -- in line with the meaningful increase in our assets that we manage.

So, you can -- but, also temper that with the fact that we are over 50% institutional now. So, we get back to where we were early '08 on end-of-period assets and average asset run rate. Even though we're a lot more efficient in a lot of the things that we're doing, there will be a little bit of effective fee rate considerations there based on the mix of the business. But, I would think that the profit margins will normalize more or less to where they were end of '07, beginning of '08.

Okay. And then, on the retail side, do you think there's any change in the way that that channel is thinking about REITs? Obviously, we've seen a lot of consolidation in terms of the retail channel, but is there any rethinking about REIT shelf space?

No rethinking. In the 12-month period of relative chaos with respect to the major distributors, the focus has been on making sure that we stay in touch with who the gatekeepers and decision makers are. We've done a terrific job of that, and we have been. Just as on the distribution side, on the institutional sub-advisory relationships, we continue to improve our shelf space and our positioning with the four or five major broker-dealers.

And we're also well down the road to getting good shelf space for our two alternative strategies, which heretofore and today are not offered via retail. And as you can imagine, there really haven't been any decisions made over the last year by any of the distributors to add or change their alternative line-up.

But, as you just heard, we have two exceptional teams with exceptional numbers in an area of real interest on the part of the distributors, so we're having no problem getting shelf space. And particularly with our performance, we're getting better and better shelf space. And we're observing that area settling down. All the consolidation between the various firms seems to be settling out and decisions are beginning to be made, and we're looking forward to that.

I think -- this is Marty. I think one of the biggest macro factors affecting retail is the fixed-income market, where anywhere from ten to one to higher flows are going through fixed-income investments. Whether that's sustainable or not, I don't know, but if that changes, then certainly that should impact equity managers such as us.

Okay, great. And then, you also called out some pretty impressive institutional lends in the pipeline. Can you just talk about how we should think about those mandates funding over the next couple quarters? I think you called out about $600 million in the pipeline. Could you just talk about the fundings over the next couple quarters?

Well, that will be funded in the fourth quarter. Some of it has been. Some of it will be before year-end. We've probably got some mandates -- I would say $100 million or $200 million or so -- that might flow over to the first quarter. But, we're in the mix on a number of -- a pretty substantial number of searches, and so far our success ratio has been good, so we're hopeful that that will continue.

As you know, these -- particularly with some of these very large investors, it's very lumpy. Sometimes it takes a long time to get to the finish line. That's why we already try to give you what happened last quarter and what we know about this quarter.

Thank you. That's very helpful.

Your next question comes from Cynthia Mayer with Banc of America-Merrill Lynch.

Hi. Good morning. I'm just wondering if you can update us a little on your thinking on the use of cash. I think it's something like $6 a share at this point.

Well, as Bob mentioned, we have spent a great deal of time looking at potential acquisitions, lift-outs and others, and so far we've not found anything that meets our standards that's for sale. We've not targeted any specific use of that cash. It certainly has been a great cushion for us during the lean time of the past year. It has added a great deal of stability and safety to our Company and our employees and our shareholders and our investors. So, we don't have specific ideas to deploy that cash in some unusual way.

Okay.

And there will be a need for seed investments as our fund to funds business grows, but that's the only obvious area for cash, is seeding additional new products.

Okay. And what's your thinking on the dividend? I think you lowered it earlier this year to $0.05, but now earnings are back. So, the payout's lower?

Well, we're going to reconsider the divided on an annual basis. That's what we've decided -- the Board has decided. So, we'll take that up in March, and we'll know in March what the fourth quarter and the first quarter look like and make an adjustment, if any, then.

Okay. And lastly, you're talking a lot about real assets, and I'm just curious to know, if you're thinking of yourself as a manager of real assets, if there are any other asset classes you'd be interested in adding.

You know, we've explored that, and right now no progress. I don't think we're going to get into the gold business or oil-and-gas or some of those hard assets or currencies or other things like that. We have looked at fixed income, but interestingly, the spreads have narrowed so significantly that we don't think there's a great opportunity in fixed income. And in fact, with all the flows going into fixed income, this is probably not the time to get started in that business.

Okay. Just a couple more. I'm curious to know if you think there will be any rebalancing out of REITs given the bounce, or do you just sort of feel like you're back to where you were, so that wouldn't happen?

You know, we've always -- it's kind of a badge of honor for us that it's easy on, easy off with Cohen & Steers. And we've had some rebalancing already, but it's been rather minor. Even though REITs have rebounded, so has General Electric and Microsoft and many other stocks (inaudible) up like 70% from its low, so we haven't seen a lot of rebalancing. It might make sense that -- some rebalance out of fixed income, but we haven't seen that yet.

Okay, great. Thanks a lot.

This concludes today's questions. At this time, I would like to turn the floor back over to any closing remarks.

Great. Well, thank you all for dialing in, and we look forward to talking to you about the fourth quarter. Thank you.

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