Cohen & Steers Inc (CNS) 2011 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Cohen and Steers Second Quarter 2011 Financial Results Conference Call. (Operator instructions)

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

Thank you. And welcome to the Cohen and Steers Second 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 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 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 1-800-337-7348 for a prospectus.

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

Thank you, Sal. And good morning, everyone. Thanks for joining us today.

Yesterday, we reported net income of $0.36 per share, compared with $0.27 in the prior year and $0.30 sequentially. Second quarter of 2010 included an after-tax gain of $0.08 per share due to recoveries on the sale of previously impaired securities. After adjusting for these items, earnings per share for the second quarter of 2010 were $0.19.

We reported revenue for the quarter of $61.5 million, compared with $44.2 million in the prior year and $54.8 million sequentially. The increase in revenue from the prior year is attributable to higher average assets. Average assets for the quarter were $40.9 billion, compared with $27 billion in the prior year and $36.1 billion sequentially.

Our effective fee rate for the quarter was 56.5 basis points, down from 57.5 basis points last quarter. The decline was primarily due to a higher proportion of inflows from sub-advisory accounts which are lower fee-paying. Sub-advisory accounts now make up 73% of our institutional business.

Pretax income for the quarter was $24.2 million, compared with $15.4 million in the prior year and $19.9 million sequentially. Prior year's quarter included $3.1 million of recoveries on the sale of previously impaired securities. And after adjusting for these items, pretax income for the second quarter of 2010 was $12.2 million. Highlighting the leverage in our business -- pretax and operating margins increased almost 300 basis points from last quarter, to 39.2% and 37.3% respectively.

Before reviewing the changes in our assets under management, I wanted to briefly highlight the addition of some new schedules included in the assets under management portion of our earnings release. We have expanded the disclosure of our institutional business to include a breakdown by investment relationship, including flow data. We have also expanded the disclosure of assets under management by strategy to include the associated flow data.

Assets under management totaled a record $44.3 billion at June 30th, an increase of $6.3 billion or 16.5% from the first quarter. The increase in assets under management was attributable to record net inflows of $5.1 billion and market appreciation of $1.2 billion.

Our net inflows for the quarter included a large contribution from Daiwa, an important distribution partner in Japan. Marty will provide more color on this relationship in his prepared remarks. This marks the eighth quarter out of the last nine, dating back to the second quarter of '09, that we recorded at least $1 billion of net inflows in a quarter.

At June 30th, our global and international real estate strategies comprised 41% of the assets we manage, followed by US real estate at 37%, large cap value at 9%, global infrastructure at 7%, and preferreds at 4%.

Assets under management in our institutional separate accounts totaled $27.3 billion at June 30th, an increase of $5.4 billion, or 24%, from the first quarter. The increase was due to net inflows of $4.6 billion into US and global real estate portfolios, and market appreciation of $794 million. $4 billion of our net inflows came from Daiwa, where we act as sub-advisor.

Excluding the net inflows from Daiwa, our annualized organic growth rate for institutional accounts was 10%. Institutional accounts include $176 million of assets under management invested in our alternative global real estate and long-short strategy.

Our open-end funds had assets under management of $10.2 billion at June 30th, an increase of $823 million or 9% from the first quarter. The increase was due to net inflows of $533 million, our highest level since the first quarter of '07 and third-highest level ever; and market appreciation of $290 million. Our annualized organic growth rate for open-end funds was 23%.

Assets under management in our closed-end funds totaled $6.8 billion at June 30th, an increase of $100 million from the first quarter. The increase was primarily due to market appreciation.

Moving to expenses -- on a sequential basis, expenses increased 7.6%. The increase was primarily due to higher employee compensation, distribution and service fees, and G&A.

Our compensation-to-revenue ratio for the quarter declined 100 basis points, to 35.5%. The decline was the result of higher-than--projected growth in average assets under management, highlighting the operating leverage in our business. The sequential 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, primarily from the Cohen and Steers Realty Shares Fund. And the increase in G&A was consistent with the guidance we provided on our last call.

Turning to the balance sheet -- our cash, cash equivalents and investments totaled $206 million, compared with $182 million last quarter. And our stockholders equity was $256 million, compared with $241 million at March 31st. We remain debt-free.

Before I turn it over to Marty, I'd like to just briefly discuss a few items to consider for the second half of this year. Our effective tax rate remained at 35% this quarter, consistent with the guidance provided on the last call. And we expect that our effective tax rate will remain at approximately 35% for the second half of the year. Our compensation and revenue ratio we expect will maintain a 35.5% ratio to revenue. And finally, with respect to G&A, we expect the third and fourth quarters to remain at or about second quarter levels.

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

Thank you, Matt. And thank you all for joining us this morning.

At the outset, I'd like to address for you the sources of our asset growth and the factors that have contributed to our flows so far this year.

By far, our largest source of asset growth has been the result of our relationship with Daiwa Asset Management in Japan. We are a sub-advisor to several of their funds, primarily real estate, which have become very popular of late. In fact, REIT funds in general were some of the most popular equity funds in that country in the second quarter.

For reference, I think it's important to see the dimensions here. US real estate mutual funds had total assets of about $80 billion and have had net flows in 2011 of about $4 billion. Compare this to Japanese REIT funds that have total assets of about $60 billion and have had net flows this year of $20 billion, five times the amount of flows that have been seen in the US. This is a phenomenon that few, if any, analysts in the US have focused on.

Our net flows from Daiwa's funds were $5 billion in the first half of this year. Other major US REIT managers who we compete with have seen the balance of those flows, at $15 billion.

It's very important to note that Daiwa's funds are broadly distributed to clients through dozens of banks and brokers throughout that country. So this is not a single client, really; we have many, many shareholders throughout Japan. And as you're probably aware, Japan is one of the biggest saving societies in the world. Investors are attracted to REITs due to their current yield and their total return profile.

So this leads to a few questions that I'd like to address for you. The first is -- can this flow situation last? In answer, we can't be sure, but the flows have continued into the third quarter. At some point, it's logical that these flows will slow down, but we just can't tell you when or at what level.

Second, how sticky are these assets? Our experience through our seven-year relationship with Daiwa is that due to how and where these funds are distributed, they have tended to be held by long-term and not trading-oriented investors. Hence, we view these assets as being no different from assets held in mutual funds here in the US or elsewhere.

Third, how has this affected our investment capacity? As we've said repeatedly, we have only a small share -- $35 billion -- of this $1 trillion and growing global real estate securities market. We employ many different strategies and currently do not see any near-term limits to how much we can manage.

And fourth, what's the future of our Daiwa relationship? Needless to say, we believe our relationship is very strong. We work very hard at it. And we continue to add support both in Japan and throughout our company. We continue to explore adding new strategies as well as licensing agreements with respect to our branded indexes for new funds that may be sold in Japan in the future. So we expect to broaden our relationship with this great partner.

We shouldn't overlook that we're also enjoying industry-leading annualized organic growth rates in our other accounts -- as Matt mentioned, 23% in open-end funds and 10% in institutional accounts in the second quarter. We added about $460 million in new separate accounts during the quarter and netted an additional $300 million in other sub-advisory accounts. Further, we've been awarded nearly $500 million in new accounts, which are being funded in the third quarter and are not included in our quarter-end assets under management.

As has been recently announced, we're very proud to have been awarded a $300 million global real estate mandate from the Taiwan Labor Pension Fund. This demonstrates, along with our other relationships, how we view Asia as a terrific growth opportunity for us. And we continue to add resources in our Hong Kong office. We do also see, of course, ongoing potential in Europe as well as here in the US.

Finally, our non-real estate strategies are enjoying substantial growth. Large cap value with over $4 billion in assets under management had an annualized organic growth rate of 16% in the second quarter. And I'm pleased to report that our large cap team is now delivering vastly improved results and is approaching the top quartile of its peer group so far in 2011.

Our Open-End Preferred Securities Fund, launched a little more than a year ago, is now over $450 million. And overall, this segment of our business had a 55% annualized organic growth rate. We continue to be a major player in this market and have established ourselves as one of the very few who've excelled at managing preferred securities portfolios.

In closing -- during the financial crisis, when Bob and I committed to enhance our resources in anticipation of the recoveries, we frankly didn't expect the rebound to come as quickly or as steeply as it has. Here we are now, as our assets are nearly $10 billion higher than our previous all-time peak. And we believe that our strategy has been vindicated. As Matt mentioned, this has had extremely positive impact on our profit margins. And we believe the stature of our company in the asset management industry has improved, and it's a position that we work every day to maintain.

With that, let me open it up to questions.

(Operator instructions) Michael Carrier, Deutsche Bank.

First, just focusing on the flows -- just a remarkable quarter. But when you think about the distribution opportunities -- if there's a lot of concentration in the Japan market -- then, on the flipside, what do you see as opportunities in Europe? I know you recently launched a [usage] fund. But if it's that concentrated, then it just seems like over time, if these products continue to gain traction globally, then there could be more distribution opportunities, particularly in Europe.

I think that's true -- this is Bob.

We do think there are very sizeable opportunities for us in Europe, particularly in forging distribution relationships with some of the largest financial institutions in Europe. And we've made a great deal of progress there. And I fully hope and expect to be able to talk more specifically about some development there later in the year.

That said, the Asian markets really do hold tremendous promise as those markets open up to new products -- mutual funds and likewise. And we're pretty pleased that we manage money today for some of the largest pools of capital in China, Taiwan and Japan.

Then, just with the Daiwa relationship -- with the big increase this quarter -- and even the flows over the past one to two years -- was there a product that the Japanese client was rotating out of in favor of US -- or global real estate products? Particularly this quarter, was there something that was just unique for the big increase?

I don't know where the outflows have been. But after REIT funds, the second-best selling funds in Japan have been bond funds. So I don't think there's been a massive move toward equities, but I do think these two -- both bonds and -- of course, in a zero-interest rate environment, international bond funds can be very attractive to Japanese investors. I don't know where the flows would come out of.

And I would simply add that, as Marty alluded to -- I'm not sure they think of REITs or real estate strictly as an equity or stock play. I think what we're seeing, not just in Japan, is increasing momentum in flows going into both rising income and real assets. And I think that's a broader macro that you're seeing being played out globally.

Yes, that makes sense.

Then, maybe one for Matt -- given the big increase, can you just remind us -- in general, some of the times the fees are going to change -- but just relative to the overall rate or relative to the open-end funds, on the sub-advisory side, the rough fee rate, just so as that portion of the business continues to grow we just get that rate over time?

I think, like Marty said, the growth rates are still industry-leading, ex the Daiwa contribution. So at some point, we're going to have other aspects of the business kick in. So we think that probably in the second half of the year there might be another small decline in the effective fee rate. But I don't think it's going to be anything dramatic. And then we foresee that stabilizing next year.

Thanks a lot.

Alex Blostein, Goldman Sachs.

I was hoping maybe we can just dig a little bit deeper into the underlying characteristics of that $4 billion. I understand it's a single sub-advisory relationship. But can you talk a little bit more about the clients that that was actually serving, and who are the distributors within that?

Sure. As I mentioned, these are very broadly distributed funds. And the Japanese financial system is a little different from that in the US. In Japan, you've got maybe a half a dozen leading firms -- Nomura, Daiwa, Nikko, Shinko, and a couple of others. And each of them have established sub-advisory relationships with various asset classes. Some asset classes they manage themselves, and some they use sub-advisors. I think for REITs, they almost exclusively use sub-advisors.

Then, they have a network of brokers throughout the country. But they also distribute to banks. So a bank like Resona Bank, which is very large -- they will -- they will offer a Daiwa fund that's managed by Cohen and Steers. And they offer it to their bank clients. And again, think about a zero-return environment that Japan has enjoyed now for two decades. The fact that you can deliver a decent yield and some appreciation potential is something that is very attractive to Japanese investors and savers.

We particularly like the bank channel because that's where just those individuals are -- savers. And that's why -- our experience over the past seven years is that it's not -- I think there's a perception on the part of some that there's some fast money in Japan. And I'm sure there's fast money around the world -- no one country has a lock on that.

But I think from a savings standpoint, the Japanese are leading the world in savings. And again, there's dozens of banks and brokers that distribute these funds throughout the country. And I don't know how many shareholders we have, but it's many, many thousands.

Does that address that?

Yes, that's very helpful.

Just shifting gears a little bit -- on the open-end channel -- it looks like flows have gotten better over the last few quarters, pretty stable. Where do you think we are in the process of people potentially starting to migrate out of bond funds and maybe into more equity income or into strategies, given that the yields are obviously a little bit more attractive there? And is that an opportunity for you guys, given the lineup?

It's a fantastic opportunity for us. Our sense is that 2011 will prove to be the first year, really, where you've seen a beginning of that migration. But frankly, I think it's barely begun. I mean, you've just recently seen -- for all the talk about how investors should focus on dividend growers, in the large cap space, those stocks didn't start to outperform till the last several months. And the flows there have been okay, but not great.

The flows into our REIT mutual funds, particularly from the broker-dealer community, have improved substantially. But on a historic basis, they're still -- they're not outstanding. I'd say they're good and getting better every day. But I think there's a long way to go here.

Understood.

And Matt, maybe one for you -- if we go back to maybe '07, you guys were running with almost half the assets that you're running with now. Yet the operating margin of the business was well over 40%. And I understand that the investment banking, I think, played maybe -- the business banks are slightly different. But as far as I recall, I think investment banking was margin-dilutive relative to asset management.

So given the tremendous growth you guys have seen, and the assets have doubled -- what do we think the margins are going to be, sort of playing out for the next few years?

We never really give guidance on margins, and we don't really manage to the margins. But that said, one of the things that we should refer to, going back to '07, was that our effective fee rates were mid-60s back then. So that's been part of it. But I think we've seen some nice margin expansion this quarter. I think that there's -- depending on how the assets grow, there's probably some more margin expansion in the second half of the year. So we could be approaching 40%. Whether we get back to the '07 levels or not is dependent upon a lot of other factors. But I think getting back to [our fore handle] is something that we would expect to see.

Okay.

Sorry, just one last one, on the margin and the flow dynamic -- would you think that the sub-advisory flow that you guys are getting -- is that a higher-margin business, all-in comp, distribution, marketing, et cetera; relative to what you currently have on the ground, whether it be institutional business or the open-end fund business?

I can't tell you that one is more profitable than another. Because whereas the fees are lower -- the fees might be lower, but there are still expenses. In other higher-fee assets, there's a lot of distribution fees that you pay. So it's hard to single out one as being much more profitable than another.

But I'd just like to add one thing to what Matt said, Alex, about historic margins versus current margins. When you look at '07, we had a very high percentage -- about a third of our assets was in closed-end funds. Now that's a very small part -- much smaller part of our business. We have said -- I've mentioned this in previous calls -- we have so many more accounts, and the complexities of these accounts have grown in size. So it is a -- it is not a business that -- though scalable, it's a very different business than it was four years ago.

Got it. Thanks, guys.

Adam Bidi, Bank of America Merrill Lynch.

Firstly, just a quick clarification on the Taiwan mandate -- did that fund in 2Q, or are [those] still to come?

Still to come.

Still to come. Thank you.

Also, one of the growth opportunities that you've identified is the under-allocation of pension funds and other institutions to publicly listed real estate. I was hoping you could give us some color on what you're seeing in that area, either through direct discussions or industry trends that you monitor, in terms of possibly correcting that -- in other words, institutions perhaps increasing their allocations to REITs and other listed real estate.

As we've been talking about -- first, I think you're seeing institutions allocate an increasing portion of their portfolios to real asset strategies of all kinds. Secondly, real estate certainly is one of the -- if not the largest component of the real asset category. The combination of the financial crisis and the liquidity issues that arose out of that, together with just more and better academic work and whitepapers -- some of which we've published -- have illuminated just the relative benefits of listed real estate or securitized real estate versus private.

So I think the pie for real estate is growing. And the proportion of that pie that is being allocated to global REITs is increasing substantially, simply based on the empirical evidence that they've generated better returns with liquidity versus core real estate, which is private.

So I think that's part of the tremendous leverage in this segment of the market, is that the flows are growing very substantially from sources that heretofore didn't really exist. Ten, 15 years ago, this was almost exclusively a retail market. Now you're seeing the largest-hedge sovereign funds in the world allocating to listed real estate, and many more other institutions following suit, and endowments that found themselves way too heavily weighted in illiquid investments including real estate in the financial [crisis].

So this is, I think, a macro trend that is underway and accelerating.

Let me add something on the Taiwan situation. The Taiwan fund actually committed $900 million. I think it was $300 million each of three managers, of which we were one. I think that's indicative of what Bob is suggesting.

Right, the overall size.

And could you comment on the exposure of Cohen and Steers to the European crisis, or potential further crisis there, either through the fund holdings or your account base?

In terms of our investment strategies -- we have three strategies which have allocations to European companies. In the global real estate securities strategies, the index weighting in Europe is about 16%. So it's relatively small relative to (inaudible) global portfolios. And Europe has actually had the smaller share in the public market compared with the private market for real estate.

The second area would be in the listed infrastructure, where the Europe allocation is much larger than that -- it's in the 30% range. And that's across a broad spectrum of industries -- utility companies, toll roads, airports, sea ports, et cetera.

Then, the final area is in our preferred security strategies, where there are a lot of European financial institutions, banks, that have issued US dollar-denominated preferred securities.

That's very helpful. That's all I had today, thank you.

Mac Sykes, Gabelli and Company.

Congratulations on the quarter. Just phenomenal performance. I think we calculated that the inflows averaged almost $80 million per day this quarter, so, terrific.

I had a couple quick questions. Just in terms of the pace of inflows -- what factors could impact the pace there? Could it be weaker perception around US housing, higher fixed income yields? And then, secondarily, do the currency movements factor into the investment decision by those clients overseas?

It's hard to know what influences the flows coming out of Japan and other sub-advisory relationships. As Marty mentioned, I don't think there's any one driving force, as Marty specified. It's a very broad and diverse distribution system, and they're really investing for yields and total return from real assets.

Also, I think weakness in the bond market or higher yields actually helps us. Because it spurs investors to consider sources of income where they're not going to lose principal. That's dividend growers, that's REITs, and listed infrastructure. So that really helps us.

I think the only thing I can think of that surely would be problematic would be a double dip, and job creation going negative. And job creation is key to real estate and most other cyclical investments. But beyond that, I don't really see anything, any one factor, that would change the direction of flows.

When you're competing for institutional mandates -- can you just name some of the other competitors that may be presenting, as well as you?

Yes, we have two or three that are consistently with us in competitions -- EII, Invesco, Morgan Stanley.

Great. Thank you very much.

(Operator instructions) Greg DiMarzio, Century Cap.

I wanted to ask about the cash on the balance sheet. You've talked in the past about possibly deploying into acquisitions, but the hurdles are obviously very high for the cultural fit, and I think that's the right way to be. You did a special, I think, after this quarter last year. Will the Board review that?

The Board reviews all -- we've mentioned in the past, acquisitions -- nothing to report. Share buybacks haven't really been that effective. Dividends is something we always consider as returning capital to shareholder -- [or] doing nothing [in the fourth]. We discuss this with our Board every quarter. So can't tell you what we're going to do or discuss, but we always discuss everything.

Would you get back to the point of a 50% sort of run rate ongoing dividend?

That's been roughly our philosophy, is to have about a 50% on a regular basis. As I'm sure you're aware, our cash earnings are much higher than our reported earnings. And there are things that we consider when we consider distributions and dividends overall.

Okay. And you mentioned a buyback is probably not high on your list?

We've not seen any evidence in Corporate America that buybacks have been net effective, delivering shareholder value.

Great.

Thanks again, guys. Excellent quarter. And actually, as one shareholder, I would agree -- I think the ongoing dividend is the best use of cash. Thanks, guys.

Thank you.

There are no further questions at this time. I'd like to turn the call back over to you, Mr. Rappa.

Thank you very much for joining us today. And we look forward to speaking with you again next 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.