Cohen & Steers Inc (CNS) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers second quarter of 2010 financial results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Thursday, July 22, 2010.

It is now my pleasure to turn the conference 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 2010 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 Matt, 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 2009 Form 10-K, which is available on our website at cohenandsteers.com. I'll 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 and in our previous earnings releases, each 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 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 Matt.

Thanks, Sal. Good morning, everyone, and thank you for joining us today. Yesterday, we reported net income of $0.27 per share compared to a loss of $0.15 per share in the prior year, and net income of $0.21 per share sequentially. The second quarter of 2010 includes an $0.08 per share after-tax gain resulting from recoveries on the sale of previously impaired securities. After adjusting for this item, earnings per share were $0.19.

The second quarter of 2009 included a $0.30 per share impairment charge on available for sale securities. After adjusting for this item, earnings per share were $0.15.

We reported revenue for the quarter of $44.2 million compared with $26.4 million in the prior year and $41.3 million sequentially. The increase in revenue from the prior year is attributable to higher average assets, resulting primarily from market appreciation and institutional net inflows. Average assets for the quarter were $27 billion compared with $14.6 billion in the prior year and $24.9 billion, sequentially.

Our effective fee rate for the quarter was 60.5 basis points, down from 61.5 basis points last quarter. The decline was primarily due to a higher proportion of institutional inflows from existing sub-advisory accounts, which are lower fee paying.

Pretax income for the quarter was $15.4 million compared with a pretax loss of $5 million in the prior year and pretax income of $13.5 million, sequentially. This quarter's results include a $3.1 million recovery on the sale of previously impaired securities. After adjusting for this item, pretax income was $12.2 million. The prior year's quarter included an impairment charge of $14 million on available for sale securities. After adjusting for this item, pretax income was $9.1 million.

Excluding the $3.1 million recovery on the sale of previously impaired securities, our pretax profit margin for the second quarter was 28%. Our operating margin remained at 30%.

Now we'll review some changes in our assets under management. Assets under management decreased to $26.2 billion from $27.2 billion at March 31. The decrease in assets under management was attributable to market depreciation of $2.2 billion, partially offset by net inflows of $1.2 billion. At June 30, US REIT common stocks comprised 45% of the total assets we manage, followed by international REIT common stocks at 25%; large cap value at 11%; preferreds at 8%; and listed infrastructure and utilities at 8%.

Our open-end funds had assets under management of $6.6 billion at June 30, a decrease of $363 million or 5% from the first quarter. The decrease was due to market depreciation of $538 million, partially offset by net inflows of $175 million. Domestic portfolios had $121 million of net inflows, while international and global portfolios had $54 million of net inflows. Annualizing second quarter flows, our organic growth rate for open-end funds was 10%. For the last 12 months, our organic growth rate was 20%.

Assets under management in our closed-end funds totaled $5.3 billion at June 30, a decrease of $421 million or 7% from the first quarter. The decrease was primarily due to market appreciation. Assets under management in our institutional separate accounts totaled $14.3 billion at June 30, a decrease of $171 million or 1% from the first quarter. The decrease was due to market depreciation of $1.2 billion, partially offset by net inflows of $1.1 billion, virtually all of which were from sub-advisory accounts into global and large cap value portfolios.

Annualizing second quarter flows, our organic growth rate for institutional accounts was 29%. For the last 12 months, our organic growth rate was 50%. Institutional separate accounts include $217 million of assets under management invested in our alternative global real estate long/short strategy.

Moving to expenses, on a sequential basis, expenses were up 7%, primarily due to higher employee compensation, distribution and service fees, and G&A. Our compensation to revenue ratio for the quarter was 39%, the same as the first quarter and consistent with the guidance we provided on our last call.

Generally, distribution and service fee expense will vary, based upon the average asset levels in our open-end load or no-load mutual funds. The sequential variance is in line with the increase in the average assets of our open-end no-load mutual funds, primarily from CSR, the Cohen & Steers Realty Shares Fund. G&A increased 5% from last quarter. The increase, which was primarily due to higher levels of business activity, is in line with the guidance we provided on our last call.

Before I review our financial condition and provide some thoughts about the second half of the year, I thought it would be helpful if I spent a few minutes explaining the captions used in non-operating income.

We utilize three main captions to classify our firm investments -- gain or loss from trading securities; gain or loss from available for sale securities; and equity in earnings or losses of affiliates.

The caption gain or loss from trading securities is used to record the total realized and unrealized trading gains and losses in seed investments, where we have a controlling financial interest, and as a result, must temporarily consolidate the investment. The $371,000 loss for the quarter ended June 30, 2010 represents the realized and unrealized loss on our seed investment in the Cohen & Steers Preferred Securities and Income Fund, which was launched in May of this year. The results for the first quarter of 2010 and the second quarter of last year represent the consolidated realized and unrealized gains from our investment in the global real estate long/short funds.

The caption gain or loss from available for sale securities is used to record realized trading gains and losses in certain seed and corporate investments. The caption is also used to record any impairments and recoveries on the underlying securities. The $3.3 million gain for the quarter ended June 30, 2010 is primarily due to recoveries recorded on the sale of previously impaired investments. The results for the second quarter of last year are primarily due to impairments recorded on certain available for sale securities.

And finally, the caption equity in earnings or losses of affiliates is used to record the economic results from seed investments, where we exert significant influence but we do not have financial control; and as a result, we do not consolidate the investment. The $1.4 million loss for the quarter ended June 30, 2010 represents the economic loss associated with our seed investments in the global real estate long-short funds and the Cohen & Steers global-listed infrastructure fund.

Turning to the balance sheet, our cash, cash equivalents and investments totaled $241 million compared with $237 million last quarter. Stockholders equity was $289 million compared with $288 million at March 31. And we remain debt free.

Let me briefly discuss a few items to consider for the second half of 2010. The effective tax rate of 24.6% for the quarter includes discreet items, the most significant of which is attributable to the sale of previously impaired securities. Excluding the discreet items, the effective tax rate was 34%. We estimate that our tax rate will remain at 34% in each of the third and fourth quarters.

We expect compensation to remain at the 39% compensation to revenue ratio. And with respect to G&A, we expect the third and fourth quarters to remain at second-quarter levels.

Now I'd like to turn it over to Marty.

Thank you, Matt, and thank you all for listening this morning.

Clearly, the story for the quarter and, for that matter, the past year, has been our net inflows. Overall, as a company, we enjoyed an 18% organic growth rate in the second quarter, and excluding closed-end funds, that number was 23%. And the 12-month number is, as well, industry-leading. As a result, our decline in AUM during the quarter was relatively modest when you consider that the market headwinds were quite severe. Our benchmarks declined anywhere from 4% to 11% in the second quarter.

I'd also like to note, however, that it appears that our asset and global diversification is working well for us, as the correlation of our assets under management to just the US REIT indexes continues to decline.

Since the quarter, we have already added about $425 million in institutional assets that have either already funded or will do so shortly. And in addition, third-quarter performance has started out quite well, with benchmarks up in the 4% to 7% range, reversing some of the deterioration that we had in the second quarter.

There are two areas that we think are worthy of discussing in greater detail. The first is the breadth of our distribution.

The majority of our assets and net flows have been in the category we call Institutional Separate Accounts. We have approximately 100 accounts directly with pension and endowment funds and the like. The large amount of assets in this category, however, is in subadvisory mandates. We treat them as institutions since the relationship is directly with the sponsors of these funds. They range from consultants to banks, insurance companies, and other financial institutions. They exclude broker-dealers and registered investment advisors, which we categorize as retail.

We have upwards of 20 such subadvisory relationships, and many of these sponsors offer several funds and strategies that we manage for them. These relationships give us access to an extremely large number of investors, both in the United States and internationally. We are particularly enjoying great penetration outside the US, with success in Japan, Australia, and continental Europe. The cost of this, of course, is that these relationships tend to be lower fee-paying.

The second point is that the growth we are experiencing is not just a coincidence. Foremost, it is the result of the strong performance and brand that we've established. It's also the result of the progress we continue to make in enhancing and broadening the reach of our marketing and client service efforts.

We have brought on several key people, including a new head of marketing, Tony Ialeggio, who comes to us from AllianceBernsteinm, and have also added new key accounts personnel, all of whom are well-regarded and well-known in their respective channels. We have new heads of marketing and communications, and product development, also individuals with great depth of experience.

Our commitment to Asia continues to grow as well. We have established a new position in business development and client service with Anton Chang in our Hong Kong office, as well as increased support for our Japanese clients. Our Hong Kong office is bustling and is our fastest-growing, as we've added new real estate analysts and a new infrastructure analyst there as well.

Whereas our asset levels are below their peak of 2007, the scope and complexity of our business are significantly greater. As I mentioned, the relationships and platforms in which our services are offered continue to grow; but with that, so do the number of customized portfolios that we manage. This complexity is amplified as both our clients and the assets that we manage for them are increasingly non-US.

Management's challenge, as always, is to maintain adequate profit margins in this business model. So far, we're pleased to have accomplished this.

Finally, on the product side, the only thing new to report is that we have launched our open-end preferred securities fund. This is our first open-end fund launched in five years, and early indications with respect to sales are promising. We think this is a timely offering in light of the low interest rate environment that prevails and which may prevail for some time to come, and the premium yield that these securities deliver.

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

Michael Carrier, Deutsche Bank.

Just on the distribution side -- and thanks for the color on the institutional separate accounts -- when you're talking to those clients, where's the most interest in terms of products? And then in terms of the penetration in the different markets, whether it's the US -- you mentioned Europe, Japan, Australia -- like, how much more do you have to go when you look at the landscape there, in terms of the number of accounts that you're -- you have relationships versus what you consider the market opportunity?

And then just on the fee rate -- maybe the last one for Matt, is -- relative to the fund business, what are these fee rates coming in at, just so we can gauge the realization rate going forward?

Well, taking the continents one at a time, Japan has been very successful for us with our relationship with Daiwa Securities and Daiwa Asset Management. We think there's room to grow there. There's a great deal of interest in global real estate investing. We have continued flows and, based on a competitive analysis, we think there is room there.

In Australia, as everyone knows, there's a great deal of demand for investment product with respect to the superannuation funds. We've got some pretty good presence there. We think there's a lot of room to grow in Australia.

And in continental Europe, it's been somewhat -- some platform investing, but it's also been some separate accounts with -- directly with institutions.

On the fee side, they vary. I think Matt can give you a little color on that. Understand when we talk about fees, we're talking about net fees to us and there's a lot of costs -- it's not as simple as that, but we can give you some color on it.

Sure. With respect to open-end and closed-end, we really haven't seen too much movement. Closed-end has gone up because of fee waivers, but essentially they've been pretty static. Most of the flows that we've been getting, as we said in our remarks, have been subadvisory. And as subadvisory relationships in general has become a bigger portion of the overall institutional assets that we manage, there's been an adjustment to the fee.

So what we're seeing coming in now is more in the mid-30 range on a subadvisory basis, blended. And that's what's really having the effect of bringing the effective fee rate down. We see maybe a slight reduction in the third and the fourth quarter from second-quarter levels, but not as much as we saw from the first quarter to the second quarter.

Okay. That's helpful. And then just on the expense side, in terms of the comp ratio, just given the level of business and activity, I guess, where would the asset levels have to be or where would revenues have to be, just balancing all the investment and that kind of stuff that you're doing, but where we could see that start to trend down, and then we could see the operating leverage start to pick up in the model?

Yes. I think what -- we believe that for the rest of this year, at least where we see it today, 39% is the right number. But everybody's got models, so we would think that in 2011, the comp ratio would start to tick down a little bit, and we have it coming down anywhere from [3% to] -- maybe like 10% -- 10% to 12%, 15% reduction in 2011 from where it is now.

Okay. Thanks a lot.

You mean like 3 to 4 -- 3 points, Matt?

Well --

The ratio.

It's going to come down 5% -- 10% to 15% down from where it is now. So it's maybe like a 35%, 34% ratio for next year.

Okay.

That is a lot of assumptions there, of course, on depreciation flows.

Right.

If the trends continue, that's where we may be headed.

Okay. Thanks a lot.

Alex Blostein, Goldman Sachs.

Is it possible to get a little more granularity on the institutional business? And which strategies specifically you've been seeing the most inflow in the first half of the year? And the pipeline that you mentioned over -- a little bit over $400 million. So which strategies are getting more traction then? And how much of that is coming from you versus existing clients?

Well, we didn't catch all of that question, you were breaking up a little, but with respect to which strategies were driving growth, there's no simple answer there. In the US, for the first half of the year, large cap value was really the leading asset growth category for us. Outside the US and in Japan, it's all about REITs. In Australia, REITs, but also listed infrastructure. We've made some -- gained some significant mandates there. In Europe, it's mainly REITs.

I would say more recently, global REITs, infrastructure, and our long-short fund have good momentum. Large cap value seems to be going fine, but not with as much momentum as we saw earlier in the year.

On the open-end side, we've been seeing the majority of the flows coming into US REIT funds, such as CSR.

Got it. And then on capital management, you guys have one of the best balance sheets I would say in the asset management space, and the cash balances continue to grow. Any plans to either do any other buyback or a dividend or any other capital plans you could highlight?

Well, you know, we've said in the past there are four -- when you have a lot of cash, there's four things you can do. One is nothing. Two is buy back stock. Three is make an acquisition, or four is make a distribution. And right now we've not made any decisions on any one of those other than number one, which is at the moment, maintain our balance sheet as it is.

Got it. Thanks.

[Doug Helman], Sidoti and Company.

First question I have, actually, is -- on the retail distribution side, where are you seeing most of the traction? Is that still IRAs or broker-dealers are coming in? What are you seeing there, I guess, the inflows from?

It's still mainly the IRAs. The broker-dealer market has shown a little bit of incremental strength, but it seems to ebb and flow with short-term trends in the marketplace, frankly. So the IRA channel, I think, has continued to be the area where we see steady inflows.

Got it.

We are -- as Marty mentioned, we did launch our preferred fund. It's early yet and it's not in every system that we'd like it to be in, but that's a relatively high-yielding fund for us and we're seeing some good initial response there.

Okay. And then also in terms of institutional, looking at the large cap, I think you talked at that kind of still having good flows, but you talked at it's lower than it was in, I guess, in the beginning of the year. Is that in any way -- and looking just performance, obviously, the one year and year-to-date, as it is underperforming, at least the benchmark -- what are the discussions there, I guess? And what is also in terms of, I guess, the positioning of the portfolio? What is done? I know there's exposure to financials there and energy. Is there any changes in terms of, I guess, the portfolio as well?

Well, we're probably not going to comment on changes in the portfolio, but again, I think the strength in large cap value was all in the separate account area. There hasn't been a lot of traction there in retail land. And you're correct, that the performance over the last 12 months, the relative performance, is below what we expect from that portfolio.

And I think it's a combination of the relative performance, but also just our sense is that investors are just not putting a lot of money into long-only strategies right now on the institutional side.

Makes sense. And just lastly, in terms of, I guess, your long/short portfolio, your long/short REIT portfolio, the global long/short, what -- I don't know if you care to comment maybe on just the performance there? And also, I guess, what is now the -- I guess your share of the investment of that portfolio?

Sure. This is Joe. For the year-to-date through June, on a net basis, the fund was down a little less than 2%. And that's in line with the average long/short equity fund of universe. As I'm sure you're well aware, it's been a very difficult environment just from a volatility perspective, if you look at the day-to-day movements in the market. But we're still very optimistic about the strategy and what the team's performance will be.

Got it. Perfect.

Our investment is about $35 million and we're about 43% of the fund.

Thank you. That's it.

Our final question comes from the line of Cynthia Mayer with Bank of America Merrill Lynch. Please proceed with your question.

This is Adam Beatty in for Cynthia. In the context of the new preferred fund, you mentioned the potential for a prolonged, sort of low-interest rate environment. In general, on the institutional side, as you've won some of these mandates and other expressions of interest, have you seen already investors searching for better income-generating investments? Or is it more of just an allocation to the real estate asset class?

And particularly on the real estate side, do you feel that you're gaining market share against similar funds? Or is the market just expanding as more institutional investors allocate to real estate?

We haven't really seen institutional investors looking just for yield. And I'd say the preferred fund is aimed largely at retail investors.

I think the institutional money coming in to real estate or REITs is, including the hedge fund, is largely a real asset allocation. And they're looking for both attractive real returns, whether it's in a low-inflation, low-interest rate environment, but also hedging themselves against the possibility of higher interest rates and inflation. And that's, I think, very much driving -- rising allocations to real asset strategies, such as real state.

Got it. Thank you. That's all I had. That's helpful. Thank you.

This concludes our Q&A session today. I would now like to turn the conference back over to our presenters.

Well, thank you all for listening in again and we look forward to speaking to you next quarter.

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.