Cohen & Steers Inc (CNS) 2011 Q4 法說會逐字稿

Welcome to the Cohen & Steers fourth-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, January 26, 2012. I would now like to turn the call 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 2011 earnings conference call. Joining me are co-Chairman and co-Chief Executive Officers, Martin 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 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 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 complete information about these funds, including charges, expenses, and risks, please call 800-330-7348 for a prospectus.

With that I will turn the call over to Matt.

Thank you, Sal. Thanks, everyone, for joining us this morning.

Yesterday we reported net income of $0.36 per share compared with $0.29 in the prior year and $0.22 sequentially. Fourth quarter 2010 included a $0.06 per share after-tax expense attributable to the launch of the Cohen & Steers Select Preferred and Income Fund 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 were $0.32.

We reported revenue for the quarter of $59.4 million compared with $51.8 million in the prior year and $61.6 million sequentially. Despite a slightly higher effective fee rate, revenue declined almost 4% sequentially as a result of lower average assets under management. Average assets for the quarter were $40.3 billion compared with $32.8 billion in the prior year and $42.9 billion sequentially.

Our effective fee rate for the quarter was 54.5 basis points, up from 53.7 basis points last quarter. The increase was primarily due to net outflows in our subadvisory channel. Subadvisory accounts are lower fee paying, so a decline in this channel will have a positive effect on our effective fee rate.

Operating income for the quarter was $22.8 million compared with $13.1 million in the prior year and $22.4 million sequentially. Last year's quarter included closed-end fund launch costs of $4.1 million. Excluding these costs, operating income was $17.2 million.

Our operating margin increased to 38.4% from 36.3% last quarter. The 200 basis point increase was primarily due to a lower compensation-to-revenue ratio and lower G&A.

Pretax income for the quarter was $25.2 million compared with $18.2 billion in the prior year and $17.6 million sequentially. Last year's quarter included the closed-end fund launch costs of $4.1 million and $1.5 million recovery on the sale of previously impaired securities. After adjusting for these items pretax income for last year's quarter was $20.8 million.

You will recall the sequential quarter included a $5.2 million loss on the seed investment in our Global Long/Short Real Estate Hedge Fund. For the year we reported net income of $1.23 per share compared with net income of $1.07 per share last year.

The 2010 results included after-tax gains of $0.17 per share and recoveries of securities sold and closed-end fund launch costs of $0.06 per share. After adjusting for these items, earnings per share for 2010 were $0.96.

Assets under management totaled $41.3 billion at December 31, an increase of $2.7 billion or 7% from the third quarter. The increase in assets under management was attributable to market appreciation of $3.7 billion partially offset by net outflows of $1.1 billion.

For the year, assets under management increased $6.8 billion or 20%. The increase was due to net inflows of $7.4 billion partially offset by market depreciation of $598 million. Our 2011 organic growth rate was 22%.

At December 31, our US real estate strategy comprised 45% of the total assets we manage. Followed by global and international real estate at 32%, large cap value at 9%, global infrastructure at 7%, and preferred securities at 5%.

Assets under management in our institutional accounts totaled $25.4 billion at December 31, an increase of $1.4 billion or 6% from the third quarter. The increase was due to market appreciation of $2.5 billion partially offset by net outflows of $1.1 billion, virtually all of which were from our subadvisory relationship in Japan.

I should note that most of the $1.1 billion of awarded mandates that Bob Steers referenced on our last call did not fund during the quarter. Marty Cohen will provide an update on the status of these mandates in a few minutes.

For the year assets under management increased $5.8 billion or 29%. The increase was due to net inflows of $6 billion partially offset by market depreciation of $284 million. Our 2011 organic growth rate for institutional accounts was 31%.

Open-end funds had assets under management of $9.6 billion, an increase of $1 billion or 12% from the third quarter. The increase was due to market appreciation of $916 million and net inflows of $91 million.

For the year, assets under management increased $1.1 billion or 13%. The increase was due to net inflows of $1.3 billion partially offset by market depreciation of $152 million. Our organic growth rate for 2011 in open-end funds was 15%.

In our closed-end funds assets under management totaled $6.3 billion, a 5% increase from the third quarter, and for the year assets under management decreased $68 million or 1%.

The last page of our earnings release contains the schedule of assets under advisement which include exchange traded funds, model-based strategies, and unit investment trusts. Fees associated with these assets are included in the Statement of Operations under the caption, Portfolio Consulting and Other Income.

Model-based strategies include assets from the major US wirehouses as well as assets from a new arrangement with Daiwa. For the quarter, the majority of the net inflows into model-based strategies were from this new arrangement. So although we recorded net outflows in our institutional account assets under management, we had offsetting inflows into our assets under advisement.

Moving to expenses. On a sequential basis assets decreased 7%. The decrease was primarily due to lower employee compensation and benefits, distribution and service fees, and G&A. The compensation-to-revenue ratio was slightly lower than the guidance we provided on the last call and was 35.6% for the year.

The sequential decrease in distribution and service fee expense was in line with the decrease in the average assets of our open-end, no load mutual funds. And the decrease in G&A was primarily due to fund reimbursements related to the launch of our private real estate multi-manager strategy and lower professional fees.

Non-operating income included a $1.7 million gain on the seed investment in our Global Long/Short Real Estate Hedge Fund. Typically, gains and losses attributable to seed investments are recorded on the balance sheet as a component of other comprehensive income, but given the proportion of our ownership in the fund, the economics are reflected in the non-operating section of the Statement of Operations.

Turning to the balance sheet, our cash, cash equivalents, and investments totaled $184 million compared with $160 million last quarter. Our stockholders' equity was $231 million compared with $215 million at September 30 and we remained debt free.

Now I will briefly discuss a few items to consider for 2012. Based on our preliminary projections, we estimate that our effective tax rate should be about 36%. With respect to compensation and benefits, we expect our compensation-to-revenue ratio will be about 34%, down from the 35.6% we recorded in 2011.

We project G&A to increase by approximately 5% in 2012. And with respect to the first quarter of 2012, we expect G&A to be more in line with the second quarter of 2011. The increase in G&A is due to a higher level of business activity, including increased marketing efforts supporting the launch of our real estate real asset open-end mutual fund. Marty will provide some context regarding this launch in a moment.

We expect that our effective fee rate for 2012 will be between 54 and 55 basis points, and, finally, fee waivers will expire on two of our closed-end funds. Based on current asset levels, these items will generate approximately $1.5 million of incremental revenue in 2012.

Now I would like to turn it over to Marty Cohen.

Thanks, Matt, and thanks for listening this morning. I have just a few comments I would like to add to Matt's remarks.

First, we think it's notable that essentially all of our asset growth in 2011 came from net inflows. This is in contrast to the substantial and chronic industry-wide net outflows from equity funds, so we certainly bucked the trend there. Our open-end fund grows and net sales were the best since 2007 and, as you are aware, our subadvisory inflows for the year were at record levels.

For the year to US real estate enjoyed the highest net inflows followed by our preferred securities strategy. The only notable net outflows were from Global and International Real Estate Funds, in sympathy, we think, with industrial concerns about slowing growth in Asia and recessionary trends in Europe.

Divergence in investment returns was very notable. US real estate was up 8.3% last year while international real estate was down 8.9%. By the way, this trend has changed somewhat this year. As of this morning, so far this year US real estate is up about 6% while international real estate is up about 8%.

As Matt mentioned, we ended the year with nearly $1 billion of institutional mandates still yet to fund, but I am pleased to say that some of those mandates have funded in January and the balance are expected to fund in the next month or so.

Second, with respect to performance, as always it remains our highest priority. Though our three-, five- and longer-term track records are still extremely good, 2011 was a mixed year for us. Our real estate strategies underperformed their benchmarks early in the year but they have been lately in an improving trend.

Similarly, our long/short real estate strategy lagged for much of the year but has recently improved substantially. We are seeing continued improvement in large cap value and we are also starting to see net inflows into that strategy. The whole dividend growth theme was getting more investor attention and we see it as having very good potential for us.

Our preferred securities performance is again industry-leading and our open-end fund is now in excess of $700 million in assets. That is after less than two years.

The third point I would like to make is that we are now live with our open-end Real Assets Mutual Fund. The fund is a combination of primarily real estate, natural resource equities, and commodities. For the first time we are using subadvisors that are leaders in their respective areas -- Investec Asset Management for natural resource equities and Gresham Investment Management for commodities.

This is a major undertaking on our part and we are mobilizing all of our marketing and distribution resources to support this launch. We believe that this is an investment that makes a great deal of sense today. Not only because of the prospect or potential for inflation, but more importantly because of the diminishing supply of resources and the increasing demand for them as world population and economies continue to grow.

The ability to offer a turnkey investment solution such as this is something that financial advisors and investors should find very appealing. And if we are right, this could be an important driver of our future asset growth.

In summary, as we begin the year we feel very good about our lineup of investment strategies and believe that they are, in every case, appropriate for the economic and financial market environment that we foresee for the next several years.

As Matt alluded to, we think we have done a good job of controlling costs and realizing expected economies of scale. This is an ongoing challenge, I think not just for Cohen & Steers, but for the asset management industry. But with 2012 off to a good start we are seeing some good market tailwinds and good flows and we think we are well-positioned for another year of growth.

I would like to take a minute in closing just to elaborate on what Matt mentioned with respect to our flows and AUM in Japan.

Six months ago we illuminated the size of the Japanese real estate fund market relative to the REIT market in general and our company in particular. We felt that this was important to disclose because its significance to our assets. Since then many analysts have been trying to reconcile Japanese fund flows and their effect on US and global real estate securities pricing, as well as our company's assets growth.

I think it's worth pointing out that this is a very complex relationship. We manage a large number of funds for Daiwa and those funds are in turn distributed in sub-funds by many other banks and financial intermediaries.

As Matt mentioned, there are certain sleeves of these portfolios that are managed in model-based UMA-like programs. This has become more substantial and it's for this reason we have reintroduced the schedule at the end of our press release which shows assets under advisement.

We don't think it's productive for us or analysts to try to regularly reconcile what you may see in Japanese mutual fund statistics and link them back to the REIT market or our business. What is meaningful is the assets under management that we reports in the subadvisory category, which includes a good number of US and foreign relationships, and whose revenues are reported in net investment management fees.

The assets under advisement that we report include a large number of model-based UMA type and other programs, as well as ETFs, that are used in numerous channels and whose revenues are reported in portfolio consulting and other fees.

We would rather not get into a lot of granularity on this, because I think it could be misleading due to its complexity and as well out of respect to the confidentiality of all of our client relationships. But we do want to direct our shareholders and analysts to the schedules that provide a succinct and accurate view of exactly how our business is doing.

So with that I would like to stop and answer any questions you all may have.

Eric, we are ready for questions.

(Operator Instructions) Michael Carrier, Deutsche Bank.

Maybe one question just on new products and then some of the distribution opportunities that you guys have touched on in the past. So I guess in terms of the real asset product, it sounds interesting, particularly given this environment.

So when you look at channels, I think you mentioned the US retail channel, but any other distribution opportunities for that product and any expected demand. And then on the distribution side I think it might have been last quarter where you mentioned some new relationships in Europe. So any update there in terms of traction or any other areas where you see those opportunities?

Well, with respect to the Real Asset Fund, as Marty mentioned, we are very excited about it. It's something we have been working on for virtually two years. It's a fairly complex fund that we have made simple for investors.

The fund itself was declared effective just yesterday, or today. It's not yet available on all the major wirehouse and other platforms, but we expect it to be available virtually everywhere in the March time period.

We have gotten extremely favorable feedback from all of the distributors, particularly because a turnkey real asset fund that takes a fairly sophisticated approach to real asset investing dovetails with virtually every firm's intermediate and long-term outlook. And it's one of the only, if not the only, fund of its kind that is delivering both these various different real asset strategies but also doing it with open architecture, with best-in-class managers running each of the core strategies.

So it's really, I think, an important new product launch for us. Ultimately, we hope to have it available in all of our channels, not just US retail.

With respect to other distribution relationships outside the US, there is really nothing new to report. I think we mentioned we added an important new relationship in the fourth quarter of last year and the flows have begun, but they are growing gradually at this point.

Okay, that is helpful. Then just when we look at the flows in the quarter, we look over the past, could be seven years, but definitely the last two years, the flows have been very strong.

So when we look at the billion or so on the outflow side, just the areas that were weak -- and I appreciate what you said in terms of the institutional pipe. A lot of that didn't fund so that will be coming in in the first quarter. Then also the model-based strategies, like those assets coming on even though they are not in AUM. So just what drove it in the quarter?

And then in terms of the outlook, particularly on those model-based strategies, was there any kind of step up this quarter and then we should see ongoing growth ahead? Or is this level of growth could that continue, because obviously your asset is almost double in that line item?

As I mentioned, there were outflows in global and inflows into US, and that was in accordance with the investment environment. So the same is true in our subadvisory channel as it is in retail and every other, and that is pretty much all there is to say to that.

What it will be in the future we don't know. It could be -- things could reverse and global becomes popular. As I mentioned, international is doing better than US so far this year, so we can't really predict. As we have always said, our goal as a firm to be available in every channel to those investors that want that particular strategy. And we will see at the end of next quarter or this quarter how that plays out.

Maybe just initially early in the year here what we are seeing is actually retail, as we think of it, as our open-end fund business is off to a very, very encouraging start. The institutional pipeline, as measured by RFP activity, is near or at historic highs. In looking at our subadvisory and non-US distribution partner business, in totality we don't see outflows currently.

Obviously, the fourth quarter was hopefully an anomaly which reflected the volatility and uncertainty, particularly in August and September, of the prior quarter. I think that had an effect on the timing of the investment of some of these committed mandates and there is no doubt that all of the uncertainty and volatility in the third quarter had a little bit of an impact on the fourth quarter, particularly in October.

But right now, with volatility having subsided substantially recently, we are very encouraged by the early flows in all of our channels.

Okay, that is helpful. Thanks a lot.

Adam Beatty, Bank of America.

First, just a question on the sequential decrease in compensation ratio. I guess from a performance standpoint absolute returns in Q4 were pretty good and performance might have lagged a bit, but similar sort of to the run rate for the year. So I was wondering what drove the decrease in comp.

We provide a comp ratio as a guide, but it's -- the main driver of setting comp at the end of the year is as much of a top down as it is a bottom up. So we went through the process that we go through every year that is based on market and merit.

So using a top-down approach and the market merit we set compensation where we thought was appropriate. And it was -- in order to get there there was a slight decline in the fourth quarter, but we had said 35.5% all along and we wound up at the end of the year at 35.6%. So I think -- I look at that overall we maintained a 35.5%-ish ratio.

But it's a good proxy and it's a good guideline, but there has been years where it has spiked in the fourth quarter and then there is years where it's flat and there is years where it's slightly down.

I appreciate the color, thanks very much. Just a question also on the net flows, for US real estate seemed like redemptions were pretty stable, actually ticked down a little bit, but the gross sales maybe came down a little. Do you feel there is any seasonality in that or what was driving that?

You are talking about the fourth-quarter number?

Yes, I am.

As I mentioned earlier, I think to some extent -- and I hate to use this terminology -- but I think following Q3 October was a risk-off type environment. So I don't think there was seasonality, I think there was a reaction to the European debt issues and the tremendous volatility on the downside that we saw in the equity markets in August and September.

Okay. So people just held off putting new money in?

I think so, yes.

Okay, good. Appreciate that. And then lastly, I mean I guess heading into 2012 two of the opportunities broadly in the investment world that have been identified are maybe the chance to buy cheap -- buy assets cheaply in Europe or in Asia and the other is maybe to -- for some to get assets from financial institutions where, in effect, forced sellers by having to build capital and what have you.

Just wondering, just hoping to get a take from the real estate perspective on those potential opportunities, whether you see opportunities in those areas in 2012.

Sure. Well, for our real estate securities strategies we believe those companies will have an opportunity to acquire assets as the deleveraging process continues to evolve, both in the US and to a greater extent in Europe.

In the US, as we look out over the next three years, we are starting to hit the peak in debt maturities. And while, because of the normalization in the credit markets and the fact that capital has mobilized, companies aren't going to be in a position to steal things, it's going to create a lot of transaction activity.

We think the winners will be those companies that have operating platforms to buy the assets that may be under-leased and use that as a way to create alpha. Buy an asset from an owner that needs to refinance, doesn't have the equity and the property to do so; maybe has an occupancy problem. If you have -- a company with a platform can make the most money in that situation.

As opposed to early 1990s, we don't think that companies then are positioned to steal things.

In Europe it's an evolving situation because of the deleveraging of the banking system. Of course, because one of the ways of doing that is to shrink balance sheets, we think that is going to put even more stress on the real estate system. Companies -- the Realty Majors type companies there that have access to capital and a great position to take advantage of that situation.

It's much earlier in that process in Europe and the opportunities are going to come in several forms, but that is something that our companies and we as a firm are focused on.

Great, thanks very much. Appreciate the color and the historical contrast. That is all I had today.

Alex Blostein, Goldman Sachs.

Marty, appreciate your comments earlier about not really willing to get into specific subadvisory relationships you guys have. So maybe just sticking to the schedule that you guys did provide, gross sales ticked down sequentially quite a lot so maybe you can provide a little more granularity on what exactly happened there.

And then I guess one of the larger funds you guys have in Japan still has a fairly high yield that some might argue is not very sustainable. So in your outlook for the subadvisory bucket as a whole how does -- how do all those pieces kind of fit in together?

Well, I think the subadvisory -- the results in the subadvisory channel were the same as they were in all the other channels, and that is US real estate was in the redemption mode and global was in -- I am sorry US real estate was in a low, for the quarter was kind of a low net lows and global was outflows. I don't know what you are --

I mean if you look -- I get the net, but the gross, if you look at subadvisory last quarter, inflows were $2.7 billion and this quarter it went down to $349 million. And that is -- it just feels like it's a much sharper decline than any other bucket that you guys have sort of seen out there.

It was the largest decline and it had had the largest inflows previous to the quarter, so it may be a result of that. A lot of investors -- in all of our subadvisory relationships there was a lot of positive momentum earlier in the year. And as Bob mentioned, as we got into the third and fourth quarter that momentum started to dissipate.

Got it. So maybe just slower sales across the board basically then?

Yes, yes.

Okay. And then the new disclosure you guys decided to break out on the assets under advisory, I guess how should we think about the underlying products that the model-based strategies are tied to? So these are all kind of REIT assets, so when we try to model it out should sort of go in line with your own investment performance or there is just other products in there? So maybe on an asset class and product basis it would be helpful to get some color.

We don't want to get into -- take this small table and blow it up into many different categories. But it's basically -- you all know what model-based strategies are. They are UMA, SMA-type platforms in the US and, as we mentioned, outside the US.

The UIT business has been very steady for us and it's a number of different strategies, and the ETFs are basically our largest of two is our -- [honestly, is] Realty Majors fund. That is pretty much what it is.

Okay. But again, fixed income, equity, even broader buckets and no call on that?

We don't have fixed income. We may have some preferred models.

It's global REIT, it's large cap value, and it's preferred. Those are the three biggest strategies that we have in that bucket.

Got it. All right. Helpful, thanks.

Mr. Rappa, there are no further questions at this time. I will now turn the call back to you.

Well, thank you all for listening in, and we will speak to you at the end of the first quarter. But call if you have any questions. Thanks.

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.