Cohen & Steers Inc (CNS) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers First Quarter 2011 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, April 21st, 2011. I would now like to turn the call over to Sal Rappa, Senior Vice President and Associate General Counsel. Please go ahead.

Thank you and welcome to the Cohen & Steers first quarter 2011 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 2010 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 reconciliation, 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. Good morning, everyone, and thank you for joining us today. Yesterday, we reported net income of $0.30 per share compared with $0.21 in the prior year and $0.29 sequentially. The fourth quarter of 2010 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 underwriters and an after-tax gain of $0.03 per share due to recoveries on the sale of previously impaired securities. After adjusting for these items, earnings per share for the fourth quarter of 2010 were $0.32.

We reported revenue for the quarter of $54.8 million compared with $41.3 million in the prior year and $51.8 million sequentially. The increase in revenue from the prior year was attributable to higher average assets, resulting primarily from net inflows into sub-advisory accounts and market appreciation.

Average assets for the quarter were $36.1 billion compared with $24.9 billion in the prior year and $32.8 billion sequentially.

Our effective fee rate for the quarter was 57.5 basis points, down from 68.5 basis points last quarter. The decline was primarily due to a higher proportion of inflows from sub-advisory accounts, which is as you all know, are lower fee paying. In fact, sub-advisory assets now comprise almost 70% of our institutional business.

Pretax income for the quarter was $19.9 million compared with $13.5 million in the prior year and $18.2 million sequentially. The sequential quarter 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 for the fourth quarter of 2010 was $20.8 million. Our pretax margin for the first quarter was 36.5%. Our operating margin was 34.5%.

Now turning to assets under management, our assets under management totaled a record $38 billion at March 31st, an increase of $3.6 billion or 10% from the fourth quarter. The increase in assets under management was attributable to net inflows of $1.8 billion and market appreciation of $1.7 billion.

At March 31st, our global and international real estate strategies comprised 44% of the total assets we manage, followed by US real estate at 32%, large cap value at 10%, global infrastructure at 8% and preferred at 4%.

Open-end funds had assets under management of $9.4 billion at March 31st, an increase of $906 million or 11% from the fourth quarter. The increase was due to net inflows of $507 million and market appreciation of $399 million. Our organic growth rate for open-end funds was 24% if you annualize first quarter flows.

Assets under management in our closed-end funds totaled $6.7 billion at March 31st, an increase of $356 million or 6% from the fourth quarter. The increase was the result of market appreciation of $227 million and $129 million of leverage from the Cohen & Steers Select Preferred and Income Fund.

Assets under management in our institutional separate accounts totaled a record $21.9 billion at March 31st, an increase of $2.3 billion or 12% from the fourth quarter. The increase was due to net inflows of $1.2 million (sic - see press release), the majority of which were from sub-advised accounts into global and US real estate portfolios and market appreciation of $1.1 billion. Our organic growth rate for institutional accounts was 25%, if you annualized first quarter flows.

Institutional separate accounts included $146 million of assets under management invested in our alternative global real estate and long-short strategy.

Moving to expenses, on a sequential basis, expenses declined 7.5%, the decrease primarily due to lower distribution and service fees. The sequential variance in distribution and service fee expense was primarily due to the $3.2 million of support payments made to underwriters in the fourth quarter associated with the launch of our preferred closed-end fund. Excluding these payments, the increase in distribution and service fee expense was in line with the increase in the average assets of our open-end, no-load mutual funds.

Our compensation to revenue ratio for the quarter was 36.5%, consistent with the guidance we provided on our last call. Excluding the organizational costs recorded in the fourth quarter associated with our closed-end fund launch, the G&A increase was within the range we provided on our last call.

Now turning to non-operating income, the sequential decline and gain from available-for-sale securities was attributable to approximately $1.5 million of recoveries on the sale of previously-impaired securities, which were recorded last quarter. The sequential decline in equity and earnings of affiliates was attributable to declines from our seed investments in the global real estate long-short funds and the global listed infrastructure fund.

With respect to the balance sheet, our cash, cash equivalents, and investments totaled $182 million compared with $197 million last quarter. Stockholders' equity was $241 million compared with $233 million at December 31st. We are still debt free.

Now briefly to discuss a couple items to consider for the second quarter and the remainder of 2011, our effective tax rate for this quarter was 35%, which is within the range we provided on our last call. We expect that our effective tax rate will remain at approximately 35%. We expect that our compensation to revenue ratio will also remain at 36.5%. Finally, with respect to G&A, we believe that we will remain at about 14% to 15% of revenue as a ratio on G&A expense moving forward.

Now I'd like to turn it over to Bob Steers.

Great, thanks Matt and good morning, everyone. As Matt has outlined, this was another very good quarter for AUM growth for us. As we've seen for over a year, the key drivers in the quarter were solid investment performance, very strong organic growth, and some capital appreciation.

I'm going to start by commenting briefly on investment performance. While all five core strategies generated positive returns in the quarter, our relative returns were a bit more mixed. US REITs, global infrastructure, and our preferred strategies continued to perform in line with or better than our peers and benchmarks, both in the quarter and over the last 12 months. However, while showing improvement versus the peer group, our large cap value strategy still lags its benchmark for the quarter and latest 12 months. So as you'd expect, we're focused intensely on improving our results here versus our peers and the benchmarks. Lastly, our global REIT strategy has also fallen behind its benchmark for the quarter and latest 12 months.

Turning to the trends and distribution, the first quarter was another period of outstanding industry-leading organic growth, which came in at 21%. In addition to the strong asset growth registered by our institutional separate account and sub-advisory relationships, retail sales especially from the broker-dealer channel rebounded strongly.

Total net flows in the quarter were $1.8 billion, which is the best result we've seen since the second quarter of '07. Importantly, the strong asset growth was derived from flows into all five of our strategies; US and global REITs, global infrastructure, preferred securities, and large cap value.

The institutional channel, as Matt mentioned, added $1.2 billion of assets in the quarter. The sub-advisory flows representing the vast majority of that total. However, institutional separate account demand across the range of our strategies also remained strong. We were awarded four institutional mandates in the quarter, three REIT and one preferred, which are just now being funded. These mandates in the aggregate amount to approximately $450 million and are not included in the $1.2 billion that I just mentioned.

Lastly, the retail channel gained momentum throughout the quarter and appears to be finally coming back in a sustainable way. Our open-end funds had $507 million of net inflows, which is the best quarter since the peak of the REIT market in Q1 '07. This represents a 24% organic growth rate. What's particularly encouraging is that the resurgence of net flows from the brokered dealer channel, which experienced organic growth of 33%.

Other positives in the quarter include a continued steady organic growth in the [IRA] channel and the flows into our new preferred stock fund, which has grown to over $300 million in under a year.

Finally, Marty and I have spent considerable time this year with our retail and institutional distribution partners along with institutional consultants, sharing our views regarding the outlook for our various investment strategies. Specifically, we believe that we're at the beginning of a new economic and real estate cycle and that cycle has become self sustaining. However, this new cycle will be different in that it will be accompanied by historically high inflation and interest rates. So in this environment, investors will focus more on real assets and dynamic not fixed income investments.

These themes have resonated with institutional and retail gatekeepers who like us believe we've entered the early stage of a bull market for most real asset and dynamic income strategies. This may be in part what's driving flows to our firm and we expect this to continue and even accelerate. Not surprisingly, our strategies for the future will continue to focus on growing assets in our existing funds while also developing the new and innovative real asset and income-oriented strategies that the markets are looking for and where our investment expertise is strongest.

Clearly, we're confident that the macro trends are very favorable for Cohen & Steers. That said, investment performance as always is paramount. While most of our strategies are performing well currently, we'll never be satisfied unless all of our strategies are top performers.

With that, I'll stop and Sal why don't we open it up to questions.

We can open up for questions.

Thank you. (Operator Instructions) Michael Carrier with Deutsche Bank.

Thanks, guys. First question is just on the growth opportunity. It seems like each quarter I think the flows come in and they're usually at the high end or [they're surprising]. I think when you look at the size of your franchise and then the opportunities that you're seeing, I guess any color and you've given us updates in the past, but particularly when you look on the institutional channel cause we can try to gauge the retail. But in the institutional market and the sub-advise space, particularly in non-US, just where you're at, how much more opportunity? Then obviously from an allocation standpoint, we'll all try to figure it out in terms of investors wanting real assets but more from a distribution standpoint where you still have opportunities to gain share?

Well, if I understand your question, you're asking if we have more opportunities to add additional distribution to take advantage of the flows that are coming into real assets? Is that right?

Yes, when you size up the global opportunity and where you are today versus where you haven't spent time on or where you still see further opportunities?

Well I think that on a very macro basis we see some of the greatest opportunity in the size of the pie, the size of the universe that we operate in. We expect to grow very substantially. Publicly-traded real estate still only amounts to about 10% of the investment grade commercial property market. But post-financial crisis where liquidity is more important than ever, we're seeing and we expect the public markets overall to gain a bigger share of the real estate and real asset pie. So as real estate and other real asset strategies become, quote, more investable, we're seeing a vast expansion of both institutional and retail interest. We're seeing institutions and retail begin to carve out substantial allocations to real asset strategies if for no other reason as an insurance policy against higher inflation and interest rates and bottlenecks in this current economic expansion.

So, we see the macro trends growing very substantially and we expect the size of our universe, universes to expand substantially over the next few years. We just see growing interest and demand for all of these strategies around the world. So, we're continuing to add distribution partners. We're continuing to introduce new strategies and new structures to help facilitate those investment flows.

Mike, this is Marty. I think we have initiatives both in Europe and in Asia. And nothing to report, but where we think those two markets are very promising. We've had not a lot of penetration in Europe, but we think that could change. We've had great penetration in Japan, but we think there's opportunities outside of Japan and Asia and we're aggressively pursuing them as well.

Okay, that's helpful. Then just on the short-term performance, you guys gave some color. I guess anything in particular from an overweight but what's driving that relative to the benchmark? I think you guys have given this before, but particularly as it pertains to either US real estate or global, just any capacity issues or just given the size of the market, where you guys stand? I know you guys said record AUM, but I know in the past it hasn't been an issue. I just wanted an update on that as well.

Let me handle-- this is Joe Harvey. Let me handle the performance question. It's really been-- Bob mentioned two areas. One is large cap value area and the other is the global real estate area. In terms of large cap value, the magnitude of underperformance has shrunk considerably and post the end of the quarter, we've picked up some ground. So we're tracking about in line with the index. We've, as we always do, when we have periods of underperformance, undergo a process to assess whether the style is just out of favor or whether there's anything in our team or process that we need to address. The biggest component of the underperformance in the large cap value dividend growth strategy has been more style. But that said, we've been working intensively to help them get back on track and we're feeling pretty good about that.

As it relates to global real estate, I'd say it's really some environmental factors. And if you just think about the past year and the whole risk-on, risk-off situation, that's made it a very challenging environment. That said, we don't make excuses and if there's anything that we've gotten wrong, we've been-- we could be better in Asia. So we've focused on improving our process and inputs in Asia and also feel good about where we're headed there.

On the capacity issue, as you're aware we have multiple strategies at Cohen & Steers. We're not one portfolio. So there's around the world and even within the US, we have lots of different strategies. This is-- we've been in business for 25 years and this has been an issue for 25 years. And we hope it will continue to be. We've been I think less than 4% or 5% of the universe with respect to our holdings throughout this period and that's where we are today. We should bear in mind that the universe is growing slightly through IPOs, more through secondary offerings of existing companies that are raising capital to take advantage of opportunities. So, we're going to grow along with the market. But not necessarily in lock step, because flows-- ebb and flow and but the growth of the universe we think is going to be constant.

Again, we're at the beginning of this cycle, as Bob mentioned. And based on our three previous cycles that we've all lived through as investment professionals, the same script is being played out. And that is you get a recovery in the assets, you get a recovery in the stocks. You get securitization taking place. The fact that securitization has proven itself to be an outstanding way to access the asset class is something that is-- continues through each cycle is reinforced more strongly. I think reinforces our optimism that the universe will continue to grow.

Okay, thanks. Last one is just in terms of the growth in the cycle, that makes sense and the demand for [RIT] assets makes sense. Just given the history of being in a business, just in the process of rising rates, how does that usually impact whether it's the actual stocks or the performance? Sometimes there's different views on that and obviously if the economic outlook is favorable and that's probably fine, but just wanted to get an update there.

You always have to qualify that question with what's the economy doing? And we think that if you have an expanded economy and a rising interest rate environment that's -- can be ideal conditions for real estate fundamentals and these securities. If you go back and look at periods of rising interest rates and Fed tightening periods, real estate securities can be restrained during that initial period of rising interest rates. Once you get part way through the cycle and then when you hit a peak in Fed tightening, then the securities really take off and perform extremely well.

Let me tie in a comment back to some of the macro views that Bob laid out for you which is concerns or expectations for rising inflation. We've also just completed a study to look at a variety of real asset classes in periods of rising inflation. If you go back to the 70's, we've identified 6 periods of rising inflation. When you look at REIT performance during those periods, on average REITs have delivered about 10% annualized during those periods, which is outperformed the S&P 500 and, as you might expect, outperformed by a pretty wide margin the bond market. Compared with other real assets like commodities and gold, REITs have not done as well as those asset classes. So, it's really been sort of a hybrid between equities and real asset classes during rising inflation in periods. That's the environment that we're looking out for. And considering the state of the real estate markets that is new construction has been essentially below what you need to replace in terms of obsolescence since 2007. We think that's a pretty good foundation for strong real estate fundamentals in a rising inflation environment.

Okay, thanks, guys.

Adam Bidi with Bank of America Merrill Lynch.

Thank you and good morning. I wanted to ask about flows into US versus international assets and securities. It looks like on the retail side and in retail equities there was a bit of a rotation during the first quarter away from international and back into US. I wanted to get your thoughts on first of all whether or not you'd seen that in your institutional flows as well from AUMs it looks like maybe you have and also what you feel might be driving that trend?

Are you talking sequential rough flows?

Yes. I mean I'm just talking-- it appears that equity investors overall have kind of pulled back from their international allocation and gone more toward domestic US equities during 1Q.

Sequentially for us, our global real estate strategy had -- the net inflows were very similar between the fourth quarter of last year and the first quarter this year. We have seen an acceleration in our US REIT portfolio. So, US REITs are up almost double from the first quarter but our international portfolios have pretty much been the same net inflows for those two quarters.

But I would say it's a tale of two cities, where in the retail channel the sales of US REIT funds versus global US is almost double global, on the other hand, institutionally the interest is overwhelmingly in global strategies. So I don't think we're detecting any discernible change in that. Institutional has and continues to focus on global and retail. I think global and international strategies are gaining momentum and gaining share, but US still dominates.

Got it. Thanks for seeing to the heart of my question. I appreciate that. Just also wanted to get your take on the natural disaster in Japan. Firstly, how that might have affected if at all Daiwa and some of your other important clients there? And also your take as we a player in real estate and infrastructure on the longer term impact of such an event?

I'll comment briefly on Daiwa and then ask Joe to talk about the investment implications. Actually it appears that the events over the past month have really not impacted, at least not negatively, Daiwa flows at all. In fact, they are-- have been accelerating and are as strong if not stronger than they've ever been. We expect that to continue.

As it relates to our investment portfolios, let's talk about real estate first. It's a relatively meaningful part of our investment universe. I guess our views are as follows. The economic bottoming process that we have been anticipating, which is a driver for real estate fundamentals is to be pushed back by a good nine months or so. Fortunately when you look at the real estate that these companies own, it's very concentrated in Tokyo. Because of the experience with earthquakes historically, these buildings are built to withstand these types of situations. So, the physical property damage was very, very minimal. But, the more important factor is the impact on the economy and the fact that the recovery bottoming and recovery will be pushed out. The stocks are down more than what we believe the impairment to the fundamental values are. So we think it's an interesting place to be looking at today.

As it relates to infrastructure, we manage to several different benchmarks. One of the benchmarks we manage to, Japan weighting is pretty large, about 18% and it includes some railway companies and electric utilities including TEPCO. In the case of TEPCO, there's obviously a significant impairment to the value of that company.

As it relates to the nuclear radiation issue, we think that's going to be something that goes away quickly. I think the more important fundamental issue is as it relates to Tokyo is interruption of power to the city. But Japan is a culture that will figure out ways to deal with that. So they'll move forward.

Thank you. That's very, very helpful. I appreciate the color. Just the last one on fee waivers. You had mentioned before fee waivers rolling off during 2011. Wondered if that has taken place and if not, what your expected timing is?

Yes, it took place in the first quarter and we have one more that'll take place next year.

Great. Thanks very much, Matt. That's all I had.

Thank you. Alex Blostein with Goldman Sachs.

Hey, guys. Good morning. I wanted to follow up on a question as far as the pie and the allocations are obviously growing to real estate strategies. What's your outlook for the closed-end fund market? And is that one of the ways you could see yourself raise enough money and taking advantage of this opportunity in the near term?

It's difficult to predict where the closed-end fund market-- where demand for new products is going to come from in that market. At the current time, we don't have any specific plans to launch anything there. There's certainly something we watch closely and we do think that high income oriented products like closed-end funds will remain in strong demand. But, we don't see any imminent opportunity for us there yet or right now.

Okay. Then I wanted to circle back on your comments earlier about the recent underperformance of some of your strategies. Yet, so the strategies are liking the benchmarks a little bit but the flows are clearly still coming in. Is that really just a function that the three-year number is still really good or is it just that there's so much demand that it's just overshadowing basically the near-term slippage in performance?

As it relates to global real estate securities, if you go back to the first two years of the three-year number, we've outperformed by some of the widest margins that we ever have. So, yes when institutions select managers, it's a comprehensive process. It evaluates not just a performance but that's balanced-- probably more focused on the longer term number, but it also takes into account the firm and its stability and direction as well as the team and the process. So there's a lot that goes into that selection process. Sometimes these processes can take a year.

So, I would also add that I think we understand why analysts might focus on three-year performance and Morningstar stars and so forth. That said, at the risk of sounding immodest, we are the brand. And we rarely, if ever, have had periods of underperformance that were not short-term in nature and have tended to be a buying opportunity. But I don't think that's ever not been the case.

So I think that institutional investors as well as retail investors, if they want exposure to real estate and other real asset strategies, one of the first names that's going to come to mind is Cohen & Steers. As long as we take care of performance, I think that'll continue.

Fair enough. Just a follow-up question on margins. Clearly the business model is built in a way where markets go up, you guys bring in flows and margins keep going higher. So, where do you see I guess your operating margin peaking? And at what level do you think you might start to get potentially some fresh air from some of the fund boards to kind of give some of that benefit to the fund holders by lowering fees?

Our funds have great points and our fee rates are set by the board. We are typically within the median of every strategy where we manage money. So there's no-- and you do have a great point. So I think the fee issue is not one that is of serious concern. Where our operating margins go, it's hard to say. We used to be at the 40% level. We're at 35% level or so, I think 40 is a very good target.

We mentioned that on the last call, just looking at the business over time. Comp ratio went down this year versus last year and with modest growth and continued flows, not necessarily at the pace that we've seen, just there's more expansion inherent in the model, both as a ratio of G&A to revenue, as a ratio of comp expense to revenue. So I think that towards the end of this year and into next year, our margins will definitely expect to get back to where they were [pre-priced].

Got you. Great, thank you.

Thank you and there are no further questions at this time. I'll now turn the conference back to our presenters to continue with the presentation or closing remarks.

Great. Thank you all for tuning in this morning and look forward to speaking to you over the summer. Thank you.

Thank you. 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.