Cohen & Steers Inc (CNS) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers first-quarter 2012 earnings 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 19, 2012. I would now like to turn the conference over to Mr. Sal Rappa, Senior Vice President and Associate General Counsel. Please go ahead, sir.

Thank you and welcome to the Cohen & Steers first-quarter 2012 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 2011 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 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 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 will turn the call over to Matt.

Thanks, Sal, and thank you everyone for joining us this morning. Yesterday, we reported net income of $0.41 per share compared with $0.30 in the prior year and $0.36 sequentially. Revenue for the quarter was $63.7 million compared with $54.8 million in the prior year and $59.4 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 $43 billion compared with $36.1 billion in the prior year and $40.3 billion sequentially.

Our effective fee rate for the quarter remained at 54.5 basis points as a decline in fees caused by a mixed shift in sub-advised accounts was offset by an increase in fees resulting from a currency mark-to-market gain.

Operating income for the quarter was $25.4 million compared with $18.9 million in the prior year and $22.8 million sequentially.

Our operating margin increased to 39.8% from 38.4% last quarter. The 140 basis point increase was primarily due to lower compensation-to-revenue and G&A-to-revenue ratios. Pretax income for the quarter was $28.4 million compared with $19.9 million in the prior year and $25.2 million sequentially.

Assets under management totaled a record $44.9 billion at March 31, an increase of $3.6 billion or 9% from the fourth quarter. The increase in assets under management was attributable to market appreciation of $4 billion, partially offset by net outflows of $425 million.

At March 31, our US real estate strategy comprised 48% of the total assets we manage, followed by global and international real estate at 29%, large-cap value at 9%, global infrastructure at 7%, and preferred securities at 5%.

Assets under management in institutional accounts totaled $26.6 billion at March 31, an increase of $1.2 billion or 5% from the fourth quarter. The increase was due to market appreciation of $2.6 billion, partially offset by net outflows of $1.4 billion, virtually all of which were from our sub-advisory relationship in Japan. Less than half the $1.1 billion of awarded mandates that were referenced on our last call funded during this quarter. Bob Steers will provide an update on the status of these mandates in a few minutes. If you annualize first-quarter flows, institutional accounts had a 21% decay rate.

Our open-end funds had assets under management of $11.6 billion at March 31, an increase of $2 billion or 20% from the fourth quarter. The increase was due to market appreciation of $1 billion and net inflows of $938 million. If you annualize first-quarter flows, open-end funds had a 39% organic growth rate.

Assets under management in our closed-end funds totaled $6.7 billion at March 31, an increase of $409 million or 7% from the fourth quarter, the increase being the result of market appreciation.

As a reminder, the last page of our earnings release contains a schedule of assets under advisement, which include model-based strategies, exchange traded funds 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, which more than doubled from the fourth quarter, include assets from the major US wire houses, as well as Daiwa, who contributed the majority of the increase. So although we recorded overall net outflows in assets under management for the quarter, our fee-generating assets, which include assets under advisement had overall net inflows.

Moving to expenses, on a sequential basis, expenses increased 5%. The increase was primarily due to higher employee compensation and benefits, distribution and service fees and G&A. The compensation-to-revenue ratio for the quarter was 34%, consistent with the guidance we provided on our last call. 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, and the increase in G&A was slightly lower than the guidance we provided on our last call.

Nonoperating income included the consolidated results for three of our seed investments. So essentially, the sequential change in nonoperating income was due to a higher net gain from the seed investment in our Long/Short Real Estate Hedge Fund, partially offset by a currency mark-to-market loss.

Turning to the balance sheet, our cash, cash equivalents and investments totaled $174 million compared with $184 million last quarter. Our stockholders' equity was $243 million compared with $231 million at December 31st, and we remain debt-free.

Let me briefly discuss a few items to consider for the second quarter and the remainder of 2012. Our effective tax rate this quarter was 36%, which was in line with the estimate we provided on our last call. We expect that our effective tax rate will remain at approximately 36%. With respect to compensation and benefits, we expect to maintain a 34% compensation-to-revenue ratio. And finally, we still expect to G&A to increase by about 5% from 2011. The increase is primarily due to a higher level of business activity, including increased marketing efforts supporting the recent launch of our Real Asset open-end mutual fund. We expect the second quarter to include a higher proportion of the year-over-year increase.

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

Thanks, Matt, and good morning, everyone. As Matt indicated, the first quarter was very solid on almost all fronts, and importantly, strong interest in income and real asset strategies, especially with retail investors, is driving this growth.

Before I get too deeply into the trends and distribution, let me comment briefly on our investment performance in the quarter. Not surprisingly, with the wind to our back in the quarter, the US international and global REIT strategies registered strong double-digit absolute returns, as did our large-cap value portfolios. Also, our Global Long/Short Hedge Fund posted a strong 9.2% net return to investors.

Our relative returns in this period were somewhat more mixed, with virtually all of our non-REIT strategies, large-cap value, preferred securities and global infrastructure handily beating their benchmarks. Importantly, for large-cap value, this extends the strong rebound in relative performance to more than 12 months and 294 basis points of outperformance. However, while our US REIT performance was roughly comparable to the benchmarks, our international and global REIT returns underperformed in the quarter. Improving the relative returns in these two important strategies is, as you would expect, our highest priority.

Turning to distribution, asset flows in our retail channel were the best since the first quarter of '07, while the trends for institutional flows were mixed, but all in all, still very solid. During the quarter, three new institutional separate accounts totaling $360 million were funded. In addition, we ended the quarter with five accounts representing $683 million that had been awarded but are yet to be funded. As Matt mentioned, four of these accounts were included in the prior quarter's pipeline discussion.

Although we only lost one separate account, it was $392 million, which largely offset the aforementioned new account activity.

As Matt already disclosed, we sustained approximately $1.4 billion of sub-advisory outflows, but that said, it is important to note that those outflows were more than offset by inflows into our model-based strategies, which continue to generate very strong growth.

As we reported, retail sales ramped up in the quarter, with gross and net sales at $1.7 billion and over $900 million, respectively. The US REIT and preferred security strategies generated the highest net inflows, while global and international REITs experienced outflows. As I mentioned at the outset, retail demand for income and real asset strategies has been and remains strong.

Finally, in January, we announced the launch of our Real Assets Mutual Fund and emphasized the strategic importance of this unique and turnkey investment solution. Since then, our internal teams have been busy rolling out our most comprehensive sales and marketing campaign ever. While it is way too early to know how successful we will be, the Fund is already available on most major distribution platforms and, despite only a short track record, is being considered for a number of proprietary research-based programs. Our very strong sense is that this investment strategy and Fund are right for the times and will be a strong and important contributor to our future growth.

With that, I would like to turn it back to the operator and open it up for questions.

(Operator Instructions) Adam Beatty, Bank of America Merrill Lynch.

Thank you and good morning. Just a question on the fee rate trend. It looks like maybe it ticked down a little bit overall. And Matt mentioned at the outset kind of a mix shift within sub-advised and some currency effects. Could you give us a little more detail on that?

Sure. Within the sub-advised, what we've seen in this quarter is that our higher fee offering, which is global, we had lower billable assets in the global, which is a higher fee-paying strategy, because of net outflows, partially offset by a little bit of appreciation. And US REIT, which is lower fee-paying, had higher average billable assets due to net inflows and market appreciation. So both the inflows in appreciation amplified the effect of higher billable assets and a lower fee-paying strategy. So that yields some kind of drag on the institutional side.

And then we all know that one of our most important institutional clients being Daiwa, when we record our fees, which are paid in yen, the spot rate of the yen versus the dollar devalued versus the average rate. So when we record the fee income at an average rate, which generally accepted accounting principles tells you you have to do, it increases fee income with an offsetting debit in non-operating. So although it is EPS neutral, it does tend to gross up the income statement.

So I think essentially it is a mix issue related to what I just articulated.

Got it. That makes sense. That is very helpful. Thank you. Then a question on the international realty sub-advised flows. I mean, performance has lagged, as you mentioned, but definitely nothing like last summer, when there were some significant challenges across the industry. But it seems like flows maybe actually got a little bit worse and I might have expected better. Any commentary on that? Is this a question of retail maybe just lagging a little bit or what are you seeing there?

That's a good question. It's hard to say. We are not really seeing -- we are seeing more muted demand for global and international. US, as a market, I think, is -- investors are more comfortable investing in US real estate, based on the lower risk of financial issues, such as you see in Europe, and the volatility you are seeing in Asia.

So on a risk-return basis, investors seem to be opting more for US than for non-US real estate investing. And the returns, I think, have been pretty solid there.

I think that is -- this is Marty -- this is the trend of the industry as well; it's not just what we are seeing. Across the industry, that's the case.

Okay, that's helpful. Much appreciated. And lastly -- thanks for taking all my questions -- just a clarification. Earlier you mentioned -- in connection -- or maybe a connection, the sub-advisory outflows and then inflows to the model-based strategies. Is any of that sort of the same customers actually physically migrating, or is it just two separate effects?

It's not the same customer (multiple speakers). It is different accounts. As I'd mentioned in connection before, lots of different accounts here.

Okay. I just wanted to clarify that. Great. Thank you very much. I appreciate it. That's all I had.

Mac Sykes, Gabelli & Company.

Good morning, gentlemen. I missed the fire drill alarms.

We have one scheduled for 11.30.

I guess if I ask the wrong question, we'll get them. Some of the -- I think you just mentioned this, but some of the recent real estate data out of China has been discouraging. Can you give us some general insight on your outlook for China, and maybe some comment on the impact of maybe having real estate investing in Asia region and also globally. And I just have one follow-up.

Sure. This is Joe Harvey. Generally, our view for China is a soft landing. As it relates to the real estate market, one of the most important segments of that is the residential real estate market. And it has been the central government's policy for the past two years to cool inflation, part of which has been driven by residential house price appreciation, by putting in austerity measures to knock down housing prices. And that has now become effective and you can see house prices going down and volumes going down.

But that to us is yesterday's news. We believe that the tightening has reached a peak and looking forward we see a bottoming in that segment of the market. So we are relatively optimistic about the opportunities in China.

With your conversations with advisors, have there been any questions about portfolio positioning ahead of potential expiration puts -- tax cuts at the end of 2012?

And then secondly, what are the comparative benefits from REIT distributions versus traditional dividend income from equities in a higher unearned income tax environment? Thanks, guys.

I don't think we've -- I haven't heard any feedback from our guys in the field regarding issues related to potential changes in the tax code and REITS. I'm sure it is on everyone's mind. You can't avoid it.

With respect to REIT distributions, since REITs are flow-through vehicles, their dividends actually never did qualify for the 15% tax on corporate dividends. And as I think you know, REIT dividends have various different components to it -- income, return of capital, capital gains. So ironically, any change in how dividends are taxed that could occur next year really would not have an effect on REIT dividend taxation. In fact, it would make REIT dividends from a tax standpoint relatively more attractive.

Thank you very much.

At the present time, there are no further questions. I will turn the conference back to you -- everyone. Please continue with your presentation or closing remarks.

Thank you all for joining us this morning, and we look forward to talking to you after the second quarter. 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. Have a great day, everyone.