Cohen & Steers Inc (CNS) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers fourth quarter and 2010 financial results conference call. (Operator instructions.) As a reminder, this conference is being recorded Thursday, January 27th, 2011.

It is now my pleasure to turn the conference over to Mr. Sal Rappa, Senior Vice President and Associate General Counsel. Please go ahead, sir.

Thank you, and welcome to the Cohen & Steers fourth quarter and full year 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 factor section of our 2009 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 proforma or non-GAAP financial measures which we believe are meaningful in evaluating the Company's performance. For detailed disclosures on these proforma metrics and their GAAP reconciliations you should refer to the financial data contained within the press release 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 and strategies. 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. And good morning, everyone. Thanks for joining us today.

Yesterday we reported net income of $0.29 per share compared with $0.27 in the prior year and $0.30 sequentially. The fourth quarter included a $0.06 per share after-tax expense attributable to the launch of the Cohen & Steers Select Preferred and Income Fund, the most significant of which were support payments made to the underwriters, and an after-tax gain of $0.03 per share due to recoveries on the sale of previous impaired securities. After adjusting for these items earnings per share were $0.32. The third quarter of 2010 included a $0.06 per share after-tax gain resulting from recoveries in the sale of securities. After adjusting for this item earnings per share were $0.25.

We reported revenue for the quarter of $51.8 million compared with $39.9 million in the prior year and $46.4 million sequentially. The increase in revenue from the prior year was attributable to higher average assets resulting primarily from market appreciation and institutional net inflows into sub-advisory accounts.

Average assets for the quarter were $32.8 billion compared with $23 billion in the prior year and $29 billion sequentially.

Our effective fee rate for the quarter was 58.5 basis points, down from 59.25 basis points last quarter. The decline was primarily due to a higher proportion of institutional net inflows from sub-advisory accounts which are lower fee paying.

Pretax income for the quarter was $18.2 million compared with $15.3 million in the prior year and $18.5 million sequentially. This quarter's results included closed-end fund launch costs of $4.1 million and a $1.5 million recovery on the sale of previously impaired securities.

After adjusting for these items pretax income was $20.8 million. The sequential quarter included a $2.2 million recovery on the sale of securities, and after adjusting for that item pretax income was $16.3 million. Adjusting for the $4.1 million closed-end fund costs, launch costs, and the $1.5 million recovery our pretax profit margin for the fourth quarter was 40% and our operating margin was 33%.

For the year we reported net income of $1.07 per share compared with a net loss of $0.04 per share last year. The 2010 results included after-tax gains of $0.17 per share due to recoveries on the sale of securities and closed-end fund launch costs of $0.06 per share. The 2009 results included charges of $0.69 per share resulting from the impairment of available for sale securities. After adjusting for these items earnings per share were $0.96 for 2010 and $0.65 for 2009.

Moving to assets under management, our assets under management totaled $34.5 billion at December 31st, an increase of $3.2 billion or 10% from the third quarter. The increase in assets under management was attributable to market appreciation of $1.8 billion and net inflows of $1.4 billion. For the year assets under management increased $9.7 billion or 39%. The increase was due to market appreciation of $4.8 billion and net inflows of $4.8 billion, and our 2010 organic growth rate was 20%.

At December 31st our global and international REIT strategies comprised 45% of the total assets we manage, followed by U.S. REITs at 30%, large cap value at 11%, global infrastructure at 9%, and preferreds at 4%.

Our open-end funds had assets under management of $8.5 billion at December 31st, an increase of $846 million or 11% from the third quarter. The increase was due to market appreciation of $513 million and net inflows of $333 million. For the year assets under management increased $2.2 billion or 35%. The increase was due to market appreciation of $1.4 billion and net inflows of $798 million. Our 2010 organic growth rate for open-end funds was 13%.

Assets under management in our closed-end funds totaled $6.4 billion at December 31st, an increase of $450 million or 8% from the third quarter. The increase was primarily due to the launch of the Cohen & Steers Select Preferred and Income Fund which raised $279 million and market appreciation of $211 million. For the year assets under management increased $807 million or 15%. Subsequent to yearend assets in the newly launched closed-end fund increased to $408 million, primarily as a result of leverage.

Assets under management in our institutional separate accounts totaled $19.6 billion at December 31st, an increase of $1.9 million or 11% from the third quarter. The increase was due to market appreciation of $1.1 billion and net inflows of $819 million, virtually all of which were from sub-advised accounts into global REIT, U.S. REIT, and global infrastructure portfolios. For the year assets under management increased $6.7 billion or 52%. The increase was due to net inflows of $3.8 billion, the majority of which were sub-advised accounts, into global REIT and large cap value portfolios and market appreciation of $2.9 billion.

Our 2010 organic growth rate for institutional separate accounts was 29%. Institutional separate accounts included $152 million of assets under management invested in our alternative global real estate and long short strategy.

Moving to expenses, on a sequential basis expenses were up 20%. The increase was primarily due to higher distribution in service fees, employee compensation, and G&A. Excluding the launch costs for the Cohen & Steers Select Preferred and Income Fund expenses were up 7% sequentially.

Distribution and service fee expense included $3.2 million of support payments made to the underwriters associated with our closed-end fund launch. Excluding these payments distribution and service fee expense was in line with the third quarter.

Our compensation to revenue ratio for the quarter remained at 39% and, therefore, the increase in compensation expense is proportionate with the increase in revenue.

G&A includes approximately $650,000 of organizational costs associated with our closed-end fund launch. Excluding these costs G&A was in line with the third quarter.

Now, with respect to non-operating income, the gains from available for sale securities included approximately $1.5 million resulting from recoveries on the sale of previously impaired securities. The rest of the caption is comprised of net realized gains from certain seed investments.

Equity and earnings of affiliates included income from our seed investments in the global real estate and long short funds and the global listed infrastructure fund.

Turning to the balance sheet, cash, cash equivalents, and investments totaled $197 million compared with $172 million last quarter. Stockholders equity was $233 million compared with $222 million at September 30th, and we remain debt-free.

Briefly discussing a few items to consider for 2011, based on our preliminary projections we estimate that our effective tax rate will pick-up a bit to between 34% and 36%. With respect to compensation we expect our compensation to revenue ratio will decline to somewhere between 35% and 37% from the 39% we recorded in 2010. We will have better clarity on this after the first quarter.

G&A will increase by approximately 9% to 11% in 2011 due to increased levels of business activity. We expect that as a result of a combination of asset mix and break points our effective fee rate for 2011 will be between 57 and 58 basis points.

And, finally, please keep in mind that we will recognize the full year of fees from the launch of the Cohen & Steers Select Preferred and Income closed-end fund. In addition, fee waivers will expire on two of our other closed-end funds. So based on current market asset levels these items will generate approximately $5 million of incremental revenue in 2011.

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

Well, thank you, Matt, and thank you, all, for joining us this morning. I'd like to amplify some of Matt's comments about our flows in 2010 and share some thoughts about 2011.

By far our largest inflows of the year were in our global real estate portfolios, $3 billion. That was followed by large cap value at $800 million, U.S. real estate at $500 million, and preferred securities at $430 million. You can see that global real estate for the year is tracking the trend in investments, generally outdistancing U.S. only portfolios. In the fourth quarter we added $440 million in global real estate, $480 million in U.S. real estate, and $350 million in preferred securities. Large cap value was essentially flat in the fourth quarter.

As Matt mentioned, the vast majority of our institutional flows were in sub-advisory accounts. These are relationships, as you know, that we have with financial institutions around the world that offer our portfolios to their clients. We've worked very hard to cultivate and service these relationships and our efforts are, indeed, bearing fruit. I should mention, as well, that we do have many and continue to add separate accounts for many institutions, such as pension and endowment funds. In 2010 we added 11 such relationships, four of them in the fourth quarter alone.

Further, the trend is continuing. So far in 2011 we have recorded $292 million of newly funded net institutional inflows and, as well, we have $287 million in five new mandates that have not yet funded. And the pipeline of potential new accounts remains as strong as ever. Again, most of these are for global real estate but all of our strategies are in the mix today.

When you examine our growth of assets in these institutional channels you can see how the composition of our business has dramatically changed over just the past few years. Compare our assets today to those in 2007 before the financial crisis and you'll see some very interesting statistics.

For example, open-end funds' assets have declined from about 30% of our total assets in 2007 to 25% today. Closed-end funds have declined almost in half from 35% of assets to 18% today. And institutional accounts have increased from 36% of total assets in 2007 to 57% today. So we have clearly become a much more institutionally oriented asset manager.

With respect to investment strategies there have been some shifts, as well. In line with the shift towards global investing, global and international real estate has expanded to 45% of our assets from 38% in 2007. U.S. real estate has declined from 38% of our assets to 30% today. And large cap value has made some significant headway, growing from only 4% of our assets in 2007 to 11% today.

We've built our Company with the philosophy that we want to be represented in as many distribution channels as possible because you never know which ones are going to be in favor or out of favor. Frankly, we can't tell you what's going to be more vibrant in the future but we're determined to maintain our presence in all distribution channels.

When it comes to investment strategies, in contrast, we do not want to be all things to all people. We prefer to focus on a rational and narrow group of sectors in which we can distinguish ourselves with our expertise and performance. These today are generally in the real asset category where dividend income is an important component of total return. We think that focus is the reason that we are enjoying such strong organic growth.

We think most would agree that we're past the bottom of the economic cycle and, for that matter, the real estate cycle. Notwithstanding issues of unemployment and depressed housing markets many economic indicators have recovered to their prior pre-recession peaks, and most economists are raising their forecasts for economic growth in 2011 and beyond.

Further, due to expansive worldwide government fiscal and monetary policies it appears that fears of deflation are being replaced with expectations for higher inflation. In light of this economic backdrop we think the portfolio of core strategies that we offer investors is quite interesting.

We believe that the nascent shift out of fixed income and into equities that we've been seeing over the past few months will favor nearly all of our offerings. For example, we expect that real estate in the U.S. and globally is a prime beneficiary of the economic environment that we foresee and the capital flows in this area have been strong and we continue to capture our fair share of this market.

In addition, we'll strongly be offering an open-end emerging markets real estate securities fund. How we're offering this is that we have currently an Asia-Pacific fund, and we've altered the investment guidelines in that fund to take advantage of a broader range of opportunities that we are seeing in this sector of the market. As you know, the emerging markets seem to have the highest current and prospective growth rates in the world.

Our second most popular strategy is large cap value. While performance last year was not as good as we had hoped our long-term track record is still intact. So far, 2011 is off to a good start performance wise and our focus on companies that have above-average dividend growth potential seems right for this time.

Barely a day goes by without hearing about the enormous global need for increased infrastructure investment -- airports, seaports, roads, utilities and the like. Institutional interest in this area already runs high and we're major factors in the institutional market here but we also think that investors at large will eventually be making commitments to this sector. Doing this with liquidity as we offer should have great appeal.

Finally, we're very pleased with both the investment performance and asset closed into our preferred securities strategy, both in the open end and closed end vehicles. You may remember, this was a highly out of favor sector just two years ago but now it is undergoing a great renaissance due to its growing importance in the capital structure of many companies, particularly those in the finance and related industries.

So we think our outlook is good. We like our portfolio of strategies. All of them are enjoying net inflows, but we always caution investors as we -- and we keep in mind internally that the environment is competitively as intent as ever. The battle for shelf space is great, and the number of shelves has been shrinking so this has put pressure on profit margins and forced us to constantly think of ways that we can improve our business without sacrificing performance or client service.

We are fortunate in that our growth in assets has allowed us to expand our profit margin, and we hope to maintain our profitability and expand it as our markets move from recovery to expansion. With that, I'd like to turn it over for some questions.

(Operator instructions.)

And our first question comes from the line of Michael Carrier from Deutsche Bank. Please proceed with your question.

Thanks, guys. Hey, Marty, one of the things that you hit on is just a lot of the products that you guys offer how well they're positioned for some of the bigger macro unit trends that are taking place. When you look at the valuations of REITs, whether it's in the U.S. or internationally, and if you think about where the fundamentals are and, more importantly, the outlook, like if the economic data points are accurate and if the inflation unit trends are accurate, and if REITs are continuing to increase dividends, can this continue to be like a multiyear where the fundamentals continue to improve so maybe the valuation looks pricy but the fundamentals are still on an upward trajectory, you know, the outlook is still going to be pretty favorable?

Well, Mike, we know that real estate is a very long cycled asset, and whenever we've gone through these periods and we, here, have gone through a number of them in the past 20, 30 years, you have some severe downdrafts and then you have multiyear periods of positive returns.

Long-term the asset has basically achieved 12% annual returns, and we're now past the bottom of that cycle and we think that's a reasonable expectation. We can't predict short-term valuations or trends because they do like any asset fluctuate, but generally we see pretty strong earnings growth and, importantly, very strong dividend growth in this sector. As you are aware, the REITs in the U.S. cut their dividends dramatically in the last downturn, and they're now just restoring them to levels that are equal to their taxable income.

So we see dividend growth there, and we think -- we don't think in quarter or six or nine-month increments, we think about multiyears. And we think that real estate can be a very strong performer over the next several years. Bear in mind, there's very little if any new construction out there, and you will start to see in various markets some rent spikes as the economy continues to grow and the demand for space increases and there's not enough vacant space to accommodate that.

Okay, that's helpful. And then when you look at your product categories, I know in the past and this was years ago you guys would talk about how significant you guys were in the REIT market but in the whole global landscape of real estate you were still pretty small and so the growth opportunity was still pretty significant. So just I guess an update on that? But then, more importantly, some of the newer areas, particularly in the infrastructure space, if there's any way to kind of quantify that in terms of the growth opportunity because assets are still relatively small relative to maybe that market?

Let me let Joe, who is our President and Chief Investment Officer, handle that because he's got those statistics right --

Sure. With respect to real estate securities we are one of the larger investors in that market, and so we do have some limitations on how much we can grow. But from here, today, all of our strategies are open and we can accommodate growth in those strategies.

It's important to keep in mind that along with the recovery that's taken place in the real estate markets we're starting to see expansion in the size of our markets, as well, as companies access equity capital to finance acquisitions and help solve the deleveraging process in the private real estate markets.

Another byproduct of that is that companies are coming public globally, so as we've experienced over the long term there'll be periods when we grow our assets and it gets larger relative to the size of the market but then the size of the markets grow and that allows us to resume our growth in assets under management.

As it relates to infrastructure, that's one area where we have no constraints, whatsoever. The listed market for infrastructure is well in excess of a trillion dollars so when you compare our assets at $2.5 billion we're very small relative to the size of the market. We also believe that the universe will be growing there as governments look to use the public markets to help recapitalize and finance their infrastructure assets and needs.

The issue with respect to our growth in assets under management and infrastructure will depend on how the asset class evolves. There's been good acceptance of infrastructure as an asset class in the private equity space. We believe we're in the very, very early stages of acceptance of the listed infrastructure market as a way to make those allocations. And, as we've talked about before, we see a lot of parallels with how listed real estate, asset allocations evolved over the past 15 years as a way to make a real estate investment. We think the same will happen with infrastructure.

If I might add, Joe, you know, lower cap value which is 11% of our assets is a multitrillion dollar market so our $3.7 billion there is also a tiny market share, and we think there's a lot of growth potential there.

Okay, thanks. And then maybe one for Matt on -- just on the cash side, you guys have done the special dividend in the past. It seems like you're focused on quite a few new products, as well. So I guess you still have a healthy level of cash. Just what's the outlook there when you balance opportunities, whether it's bolt-on acquisitions, new product launches, you know, and then maybe looking at the buybacks or a special dividend again?

This is Marty. Let me answer that. We have a sufficient amount of cash on our balance sheet to fund pretty much any new strategy that we would embark on, and we have a decent amount of capital currently tied up in that.

We examined last year all the potential uses of cash, and I think I may have mentioned this. And when we looked at all of those -- the options we felt that making a special distribution was really the best way to create shareholder value. And we looked at companies that -- what that stock and the results there were very mixed with respect to increasing shareholder value. When we looked at special dividends we saw that the market was very favorably disposed to that where essentially you paid the dividend, the stock went back to the price that it was before you did. So you had assured conveyance of value directly to shareholders.

We've mentioned in the past that we look at acquisitions. It's not been a great market for acquisitions. What we find is that if there's a strategy or a manager that's looking for a home they often have problems and we don't want to buy problems. And if they don't have problems they're -- potentially either don't fit with our focus or would not be accretive, and we don't want to make an acquisition just for an acquisition sake. As you know, particularly in a business like ours there's a lot of integration issues when you acquire assets or people, and we want to be sure that it's a perfect fit before we do something. So far we look but we haven't found anything.

Okay, thanks, guys.

(Operator instructions.)

And our next question comes from the line of [Adam Bidi], Bank of America Merrill Lynch. Please proceed with your question.

Thank you. Good morning. It looks like another solid quarter of inflows, maybe institutional easing off a little bit, and you mentioned some of the new mandates in Q4 for separate accounts but it seems like the mix is still primarily sub-advisory in terms of net flows. So I'm not sure if that suggests maybe some separate account redemptions or maybe it's just a matter of the mandates not having funded yet? Could you give some color on gross sales and redemptions in the institutional account?

Sure. This is Bob Steers. There really hasn't been any discernible change in mix. As you mentioned, the sub-advisory flows really dominate for us and they remain strong. The institutional separate account activity actually has picked up and there are a few mandates we've won recently. There are a few that are in process and some of them are very significant. So the institutional separate account business I think is actually picking up. So having slightly lower numbers in the fourth quarter. I don't think you should read anything into that.

We are encouraged that open-end retail flows, especially in the broker/dealer channel, appear to be trending higher as investors are re-risking somewhat, and it'll be interesting for the entire industry to watch the flows into or out of fixed income strategies and potentially a pick-up of inflows into hopefully what we think are income oriented, equity strategies or real asset strategies such as we offer, but we are seeing some encouraging pick-up in retail flows in the [BTE] channel.

Thanks very much. I appreciate that. On the retail side in terms of broker/dealers you've been adding kind of platforms and trying to penetrate that channel for a couple of years now. Do you feel that you're still in the mode of adding platforms or is it kind of a pat hand and you're just looking to gain additional traction?

I think we're extremely well positioned now, as you point out, we've been working diligently for several years now while there's been fairly limited opportunities in equity strategies in the retail space, I think we're -- whether it's our leadership, our sales force, the work that our key accounts people have done in opening doors for us on the right platforms, you know, that'll be an ongoing process but we're very pleased with where we are today. And I would say if flows from that channel continue to increase we're ready, we're there, and we think we'll get at least our fair share of those flows.

Thanks very much. I appreciate it. That's all I had today.

And there appear to be no further questions at this time. Please continue with your presentation or closing remarks.

Well, thank you, again, for joining us today, and call if you have questions. And we look forward to speaking to you again at the end of the first quarter.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.