Cohen & Steers Inc (CNS) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers third-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, October 20, 2011.

I would now like 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 third-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 10K which is available on our website at Cohen&Steers.com.

I want to remind you that the Company assumes no duty to update any forward-looking statements.

Also the presentation we make today may contain 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 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 the past performance is not a guarantee of future performance. For more complete information about these funds and strategies, including charges, expenses and risks, please call 1-800-330-7348 for a prospectus. With that, I will turn the call over to Matt.

Thanks, Sal, and thanks, everyone, for joining us this morning. Yesterday we reported net income of $0.22 per share compared with $0.30 in the prior year and $0.36 sequentially. The third quarter of 2010 included an after-tax gain of $0.06 per share due to recoveries on the sale of previously impaired securities. After adjusting for these items, earnings per share for the third quarter of 2010 would have been $0.25.

We reported revenue for the quarter of $61.6 million compared with $46.4 million in the prior year and $61.5 million sequentially. Due to a lower effective fee rate, revenue was flat sequentially despite a 5% increase in average assets under management.

Average assets for the quarter were $42.9 billion compared with $29 billion in the prior year and $40.9 billion sequentially.

Our effective fee rate for the quarter was 53.7 basis points, down from 56.3 basis points last quarter. The decline was primarily due to the full effect of last quarter's lower fee paying subadvisory inflows, the majority of which were recorded in late May and June, combined with a foreign currency adjustment. Subadvisory assets now comprised 76% of our institutional business.

Operating income for the quarter was $22.4 million compared with $14 million in the prior year and $22.9 million sequentially. Our operating margin declined to 36.3% from 37.3% last quarter. The 100 basis point decline is primarily due to a higher G&A to revenue ratio and a lower effective fee rate.

Pretax income for the quarter was $17.6 million compared with $18.5 million in the prior year and $24.2 million sequentially. The current quarter included a $5.2 million loss on the seed investment in our global long short real estate strategy and the prior year's quarter included $2.2 million of recoveries on the sale of previously impaired securities.

Assets under management totaled $38.6 billion at September 30, a decrease of $5.7 billion or 13% from the second quarter. The decrease in assets under management was attributable to market depreciation of $7.2 billion partially offset by net inflows of $1.5 billion.

At September 30, our US real estate strategy comprised 42% of the total assets we manage, followed by global and international real estate at 36%, large-cap value at 9%, global infrastructure at 8%, and preferred securities at 5%.

Assets under management and institutional accounts totaled $24 billion at September 30, a decrease of $3.3 billion or 12% from the second quarter. The decrease was due to market depreciation of $4.6 billion partially offset by net inflows of $1.4 billion, $1.7 billion of which came from our subadvisory relationship with Daiwa. Bob will provide more color on this relationship in his prepared remarks. Our annualized organic growth rate for institutional accounts was 20%.

Our open end funds had assets under management of $8.6 billion at September 30, a decrease of $1.6 billion or 16% from the second quarter. The decrease was due to market depreciation of $1.8 billion, partially offset by net inflows of $156 million. Our annualized organic growth rate for open end funds was 6%.

Assets under management in our closed end funds totaled $6 billion at September 30, a decrease of $830 million from the second quarter which was due to market depreciation.

Moving to expenses, on a sequential basis expenses increased 2%. The increase was primarily due to higher G&A. The increase in G&A was primarily due to a higher level of business activity, particularly with respect to business travel, investments in our infrastructure, and product development.

With respect to non-operating income, we reported a $5.2 million loss in the seed investment in our global long short real estate strategy. Typically, gains and losses attributable to seed investments are recorded on the balance sheet in Other Comprehensive Income, but given the proportion of our ownership in the long short strategy to the fund, the economics are reflected on the income statement essentially as a one-line consolidation under the Non-operating caption.

Now turning to the balance sheet, our cash, cash equivalents, and investments totaled $160 million compared with $206 million last quarter. And our stockholders' equity was $215 million compared with $256 million at September 30. The sequential declines in cash, cash equivalents and investments and stockholders' equity reflect a special dividend payment in September of approximately $43 million.

We remain debt-free.

Now let me briefly discuss a few items to consider for the fourth quarter. Our projected tax rate for 2011 increased to 38% from 35%. Previously, we projected non-operating gains for 2011 which, due to accumulated loss carry forwards, would have resulted in no associated tax expense.

Based on third-quarter results, we are now projecting non-operating losses for the year that, due to the need to establish a valuation allowance will [now] provide an associated tax benefit. Accumulative effect of this change in estimate was recorded in the third quarter resulting in an effective tax rate of 45.5%. We expect to remain at 38% as our effective tax rate for the fourth quarter.

With respect to compensation, we expect to maintain a 35.5% comp to revenue ratio and, finally, with respect to G&A for the fourth quarter, we expect that to be more in line with the G&A that we recorded in the second quarter.

Now I would like to turn it over to Bob Steers.

Great. Thanks, Matt, and good morning everyone. As we all know by now the third quarter was extremely challenging for the equity markets and investment performance, as well as asset gathering. And given that the future direction of our economy and capital markets will largely be determined by policy decisions made in Washington, it is more difficult than usual to divine where we are headed.

That said, our income and wealth asset strategy remain well-positioned in the current environment and investor interest is still very strong.

Before I open up for your questions, I would like to give you a brief update on investment performance, trends and distribution and then address a few issues that some of you have previously raised.

With respect to performance, not surprisingly, absolute returns were negative across all five of our core investment strategies and relative returns were mixed. Both the US and global REIT indexes declined by approximately 15% and 17% respectively in the quarter with the more cyclical names declining the most. Both our US and Global REIT portfolios were oriented for a global cyclical recovery and as a result underperformed in the quarter.

Conversely, our large-cap value team has maintained its strong momentum and beat their benchmarks by 180 basis points in the quarter and 89 basis points over the last 12 months. In addition, our global infrastructure strategy also handily beat its benchmarks by 203 basis points and 335 basis points for the past quarter and year, respectively. While our preferred securities returns modestly underperformed in the quarter, we remain well ahead of our competitors and benchmarks for the last 12 months.

And lastly, like many hedge funds, our global long short strategy struggled in the quarter with a net return of negative 13.8%. Obviously we are intensely focused on improving not only long short, but also our long-only REIT strategies and we are off to a promising start so far this quarter.

Turning to distribution, in spite of all of the turmoil in the quarter, firmwide organic growth remains solid if not strong across all channels. Institutional assets experienced a 20% organic growth rate in the quarter, all of which came from subadvisory clients.

Importantly, our separate account pipeline remains very full and while we added no net new separate account assets in the quarter, that is largely a timing issue. We currently have eight separate account mandates that have been awarded but are not yet funded, representing $1.1 billion, and RFP activity is strong as we enter the fourth quarter.

The retail channel had $156 million of net inflows which as Matt mentioned represents a 6% organic growth rate. Growth inflows in the quarter remained at or near highs for the year. However, outflows also increase presumably because of the market turmoil and volatility in August and September.

Our preferred securities fund continues to be a standout with assets approaching $600 million and net inflows of $167 million in the quarter. As a reminder, this fund was only launched in May of 2010.

Lastly, I would like to comment on asset flows from Japan and our ongoing new product development activities. In our second-quarter earnings call, Marty spoke about the relatively large inflows from Japan-sponsored REIT mutual funds and the sustainability of those flows.

As most of you know, several of those funds reduced at distributions in the quarter, leading to speculation regarding future flows into or out of the US REIT managers who advise those funds. While I cannot speak for the other managers, I can say that our flows from Japan in the quarter were strong and, in fact, the second highest on record for us.

Also it has been our expense that sales and marketing focus, along with investment performance, are the primary determinants of asset flows even more so than the direction or level of distributions. But although we can't predict future flows, Daiwa's focus on REITs has never been greater in the more than seven years of our relationship. And in fact, we have recently opened a Tokyo office to service and support their efforts.

Needless to say, we remain very encouraged about our partnership with Daiwa.

Lastly, a portion of the increase in G&A spending during the quarter was tied to new product development. And subsequent to quarter end, we executed the first closing of over $100 million for our new private equity real estate fund to funds, Cohen & Steers Global Realty Partners. We expect to have multiple additional closings over the next 12 months.

We also continue to work closely with our partners in the closed end fund and open and fund channels on new and innovative strategies for today's markets. And we are optimistic that early next year we will be in a position to discuss several new fund launches that hold great promise.

So I'm going to stop there and open up the floor to questions.

(Operator Instructions). Michael Carrier with Deutsche Bank.

Thanks. During the quarter, it look like the international real estate product -- that's the one that swung to the outflows, you know, while the US still had the simplest and other products were close to breakeven. So, just when you are looking at the international real estate fund what was driving that? Particularly just whether it's in terms of channels on the distribution side.

I'm not sure I have an answer to your question what drove the flows. As I mentioned what we've seen is the inflows and outflows rose in the quarter. I presume you are talking about retail flows here.

I can tell you that international performance was weaker than US performance. I think (multiple speakers) rebound since they began in the quarter, international has been stronger than US so it could be just speculation. But it is probably all the turmoil in Europe and questions about growth in Asia probably made people more cautious about international as opposed to US.

Right. I think also of the [$1 billion] of net outflows in the global strategy that we had, the majority of that is from the subadvisory channel. So we had some subadvisory. We had one advisory and very little retail outflows from that strategy.

Okay. And maybe another question on the Japan side. So, you guys have had a relationship with Daiwa for some time. It's not like this is anything new.

So I guess over time, I think what people are trying to gauge like, what's the core inflow? And then when you see either changes in yields or distributions, what's the potential reduction? And I think for you guys it is which products do you offer over there? What are the distributions or the yields and the different products? And then, how successful are you when you see outflows in certain products in terms of capturing those flows into another product that you offer through Daiwa, so net, net you are still not losing the total outflow?

We are really not going to comment on an individual client's distribution policies or product policies. And I am definitely not going to comment on what are normalized flows from Daiwa.

I can tell you that going back to 2008, 2009, 2010, 2011, we have had consistent positive flows and growing flows. But those flows are going to be affected by the factors that I mentioned earlier. It is going to be whether they are focusing on REIT products or other products as their primary area of emphasis. It is going to depend on a lot of factors that I mentioned earlier and it is virtually impossible even to predict what their marketing strategies will be, what their emphasis will be.

But what I can tell you is that, over a multi-year period, REITs in general have become very mainstream in the Japanese investment market and we don't see that changing. And we also would point out that we didn't have outflows in the 2009 period when you might expect that to happen.

So we feel very comfortable with the flows from Daiwa. They are very stable, the investor base is incredibly diverse and beyond that I don't think we really want to speculate about what a core level will be and so forth.

We do manage multiple strategies for them and we talk to them all the time about considering some of our other core strategies. And whether that will bear fruit or not in the near future, we can't really comment on.

Okay. That's helpful. And maybe last one, just on the distribution front you know maybe when I look at institutional maybe away from subadvise, where are you seeing the demand in that channel?

And I think more importantly you guys had mentioned potentially expanding distribution on the European front. So any update there where you see the opportunities?

Well, we are adding relationships. One significant one in Europe. I'm not sure that we have identified them yet, but there will be at least one significant addition to us for us there. And we continue to explore these types of partnerships around the world.

Okay, thanks a lot.

Alex Blostein with Goldman Sachs.

Thanks. Good morning. Staying on Daiwa for a second, could you talk a little bit about the timing of the inflows throughout the quarter from the subadvisory relationship which I guess is about a $1.4 billion in total. But if you could kind of just break down the timing during the quarter and how things are shaping up in October.

We don't, as Bob mentioned, we don't really think it is appropriate to comment about a single client or flows on a micro basis month-to-month. General, you can look at flows in and out of the Daiwa funds like any mutual funds that we manage that are distributed in the US. Typically when performance is strong, flows increase. When performance is weak, when markets are weak, there's outflows.

We can tell you that the level of outflows from our -- from Japanese investors has not been a significant factor. Either in the quarter or so far in the fourth quarter. But we really don't want to get into micro information that is not going to be anything more than misleading to our shareholders because it's -- it is not the only part of our business.

We have a huge staff of salespeople in retail and institutional around the world. And there's not much more to elaborate on.

I understand, but I guess we also have to face the fact that Daiwa has been such a significant contributor to your flows that it might just be more helpful for people to get more clarity on how that channel is doing, given the importance to the overall franchise.

We understand that. It is something that we watch here, but frankly through the course of our history of 25 years typically there's been either one partner or one distribution channel or one product that has been a star for us. And we can't predict what that star is going to be.

With respect to managing our business, we just have to keep very well-focused on all of our distribution channels and can't really tell you which is going to be the strongest in the next three, six or 12 months.

Understood. Okay. And then when we think about the -- I guess the yields that some of this product provide, can you help us just square away how some of the products offered to your subadvisory clients were in a higher double-digit midteens type of yields versus a 3% to 4% yield here? And you mentioned some of the distributions have been cut. Do you have a sense of how many more products you guys are subadvising still offering mid-teen or even higher yields?

This is something that is publicly available in Japan and I think everybody is getting this information out pretty regularly. The mutual fund accounting and the methods of establishing distributions are at the distributor level, not at the Cohen & Steers level. It is not unusual, and it is common, particularly in REIT funds of which we are one of several, a large handful where distributions are based on current income and realized and unrealized [depreciation].

That is something the distributor determines without consultation to us. We just manage the money. So it's the norm in the industry and as Bob mentioned, changes in distribution levels have not necessarily been the determinant of flows, whether it is at a 20% distribution level or at a 4% distribution level, it's still well above what is available to other investors in Japan or the US, for that matter.

Okay, fair enough. Shifting gears a little bit, Matt, could you comment about your I guess sustainability of your margins and I guess, more importantly, on the comp rate? If we continue to see pretty choppy environment here do you think you guys could sustain the comp rate at kind of like mid-35% level or do you think we should think about that ticking up maybe a little bit next year?

I think the comp ratio stayed consistent the second quarter and revenues are pretty much flat for the second quarter. So I think where we are right now and with the way we are viewing the fourth quarter, we feel pretty comfortable that we could sustain 35.5% in the fourth quarter.

You know, of course, as in prior years and although we do manage -- we don't really manage the comp ratio, but we use it as a discipline, we have to see how the next couple of months unfold. So it wouldn't be unprecedented if it did move away from the 35.5%, but as of this moment in time, I think we are pretty comfortable that we could sustain that.

And then last one for me, could you talk a little bit about the timing of the funding of some of this [aid to] separate managed accounts that you mentioned. So $1.1 billion when do you think you guys are think it's going to come into the run rate?

Again, that's a client decision, so we are really not going to speculate as to when that might occur.

Okay. Thanks, helpful.

[Adam Beatty] with Bank of America Merrill Lynch.

Thank you and good morning. Just a question about the institutional advisory channel. I just noticed in your filing last night that sort of year-to-date, I mean you still have net inflows which is great, the level of activity had seemed quite depressed and then it seems to have picked up significantly at the tail end of the third quarter.

Just wondering if you could comment on the overall sort of institutional environment advisory environment? Was there something driving that slow down? It typically isn't seasonal. I was wondering what you had been seeing out there.

No, I don't think our view we share your observation. The level of interest institutionally has remained high. We have been running at close to $1 billion a quarter there.

The only observation I would share is that to some extent some of those eight accounts might have been thinking of funding in the third quarter, but the volatility might have incented them to market time a little bit. So no, we have seen no diminution in the amount of interest, RFP activity is high.

If anything, I would say the level of activity is very high over the summer. There were questions about whether REIT valuations were attractive or not. At this point I think the decline in REIT share prices is sparking even higher interest because of it being an interesting entry point.

Another thing is that the mandates that we have received are all very present. So it is not like some of these mandates are from carryover some in second quarter and prior. They are all recent mandates that are in a fund. [Shortly].

Great. Those details are very helpful, much appreciated. And then I guess just following on some of those last comments around the REIT environment, if you could decide that maybe especially in the United States to the current macro environment such as it is and what -- whether you think the macro environment is beneficial for REITs at this point. Is sort of moderate or mild job growth sufficient for the overall environment? Or -- or other maybe macro factors you are looking at?

This is Joe Harvey. I'll take that. As Bob mentioned, the macro and policy environment is three challenging and that's resulted in slower pace of economic growth would higher probability of recession. So as it relates to real estate fundamentals, that is one of the key drivers for occupancies and rents and cash flows.

The one very positive offsetting factor to the slowdown and the economic growth is we haven't had any new construction for a very long period of time. So the markets in general are in pretty good health.

We have revised downward our valuations for real estate stocks, based on the slower pace of economic growth. But, due to the correction in share prices, we think that has largely been factored in.

[In pricing], great. Thank you. Just one last one on the outlook for your blended fee rate. You had indicated last time that there was kind of a glide path as the Daiwa wins and mandates were integrated.

Do you still say that stabilizing next year? Has the recent pattern of flows changed your outlook at all?

That is going to be very difficult to predict. Some of our industry shall feed rates are lower as you know, that the majority of our growth has been in the institutional channel and on the other hand whereas retail may be a higher fee or a higher cost. Very hard to predict, but I think in general, industrywide, we are seeing fee compression. I think that is an industry-wide phenomena that we will have to learn how to cope with.

Okay, thanks very much. That's all ahead.

There are no further questions at this time. I will now turn the call back overr to you. Please continue with your presentation or closing remarks.

Great. Well, thank you all for dialing in and we look forward to speaking to you early next year. 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 lines.