Cohen & Steers Inc (CNS) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers second-quarter 2012 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 on Thursday, July 19, 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 second-quarter 2012 earnings conference call. Joining me are Co-Chairmen 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 investment performance of certain of our funds and strategies. I want to remind you that past performance is not a guarantee of future performance.

This presentation will also contain information about a fund that has filed a registration statement with the SEC which has not yet become effective. This communication shall not constitute an offer to sell or the solicitation of any offer to buy these securities. For more complete information about these funds, including charges, expenses, and risks, please call 800-330-7348 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 $0.36 in the prior year and $0.41 sequentially.

Revenue for the quarter was a record $67.4 million, compared with $61.5 million in the prior year and $63.7 million sequentially. The increase in revenue from the prior year was attributable to higher average assets resulting from market appreciation, partly offset by net outflows, primarily from subadvisory accounts.

Average assets for the quarter were a record $43.6 billion, compared with $40.9 billion in the prior year and $43 billion sequentially. Our effective fee rate for the quarter was 55 basis points, up from 54.5 basis points last quarter. The increase was primarily due to a shift in the mix of our assets under management. Open-end mutual funds, which are higher fee paying, now make up a larger percentage of our overall assets under management.

Operating income for the quarter was $26.1 million, compared with $22.9 million in the prior year and $25.4 million sequentially. Our operating margin decreased to 38.7% from 39.8% last quarter. A 110 basis point decrease was primarily due to a higher G&A-to-revenue ratio. Pretax income for the quarter was $25.1 million net of noncontrolling interest, compared with $24.1 million in the prior year and $28.2 million sequentially.

Assets under management totaled $44.4 billion at June 30, a decrease of $499 million or 1% from the first quarter. The decrease in assets under management was attributable to net outflows of $1.2 billion, partially offset by market appreciation of $697 million.

At June 30, our US real estate strategy comprised 50% of the total assets we manage, followed by global and international real estate at 28%; large-cap value at 8%; global infrastructure at 7%; and preferred securities at 6%.

Assets under management in institutional accounts totaled $25.6 billion at June 30, a decrease of $1 billion or 4% from the first quarter. The decrease was due to net outflows of $1.5 billion, the majority of which were in global and international and large-cap value strategies from subadvised accounts, partially offset by market appreciation of $480 million. If you annualized second-quarter flows, institutional accounts had a decay rate of 22%.

Our open-end funds had assets under management of $12.1 billion at June 30, an increase of $526 million or 5% from the first quarter. The increase was due to net inflows of $293 million and market appreciation of $233 million. Annualizing second-quarter flows, open-end funds had a 10% organic growth rate.

Assets under management in our closed-end funds totaled $6.7 billion at June 30, which is essentially flat from last quarter. Marty will have some comments on the status of the Cohen & Steers Limited Duration Preferred and Income Fund which is scheduled to price on July 26.

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.

Assets under advisement increased by $2.2 billion or 24% from the first quarter. The majority of the increase was for model-based strategies, which increased by $2 billion or 39%.

Moving to expenses, on a sequential basis expenses increased 8%. 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 remained at 34%, consistent with the guidance 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 consistent with the guidance we provided on our last call.

On a sequential basis, nonoperating income declined $3.8 million, net of controlling interest. The decline was primarily due to losses from our seed investments in the Cohen & Steers Real Assets open-end mutual fund and the Global Real Estate Long/Short Fund.

Turning to the balance sheet, our cash, cash equivalents, and investments totaled $199 million, compared with $174 million last quarter. Our stockholders equity was $254 million, compared with $243 million at March 31.

Before turning it over to Marty Cohen, I would like to briefly discuss a few items to consider for the second half of this year. Our effective tax rate this quarter remained at 36%, consistent with the guidance we provided on our last call. As a reminder, when we calculate our effective tax rate we adjust for noncontrolling interest. 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. Finally, with respect to G&A, we have executed an extension of our lease at 280 Park Avenue through 2023. The straight-lining of the lease will add approximately $0.01 a share per quarter to G&A, which otherwise would have remained in line with the second quarter.

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

Thank you, Matt, and thank you all for joining us this morning. I don't have a lot to add to Matt's remarks on the operational side, but I would like to spend a few minutes updating you on our strategic positioning and also comment on some of our challenges.

I am pleased to report that almost without exception our asset classes are performing exceptionally well. I'll talk about our individual performance in a few minutes.

The two most notable performers in the first half of this year have been real estate and preferred securities. Real estate, both US and international, enjoyed midteens total returns in the first half alone. This return led all other equity -- and for that matter all bond index returns. Whereas there have been consistently large outflows from equity mutual funds in the United States, there have been consistent inflows into real estate funds.

In the US, flows have been nearly $10 billion, and in Japan more than $10 billion in the first half of this year. The only equity fund category that has attracted more capital this year has been emerging market equities. If you exclude ETFs from the flows businesses, our market share of net inflows into real estate funds in the US was about 43%.

Further, the US real estate funds that we subadvise in Japan were the number 1 and number 4 best-selling funds in that country. I should mention that, offsetting the US flows somewhat, as Matt alluded to, there were outflows from our global real estate funds in Japan. Let me take a minute and clarify some of the questions that have been raised and information that has been put out there.

With respect to the funds that we subadvise in Japan, there have been substantial inflows into US funds; and for our funds, the inflows have gone into model-based programs. Industry-wide in Japan, there have been outflows from global funds, including ours; and those outflows have been recorded in our assets under management.

Another point that has been raised is that distributions have been cut in several US real estate funds in Japan. As you may be aware, mutual fund accounting in Japan permits the fund companies to distribute not just earned income but unrealized gains, and they have had very high distribution levels. When those distributions are cut, the question becomes whether and to what extent there might be outflows from those funds. While it is quite possible and history has shown there have been some modest outflows over time when distributions have been cut, we really can't predict the extent to that -- that that may happen.

The second winning strategy that we have at Cohen & Steers has been preferred securities. We don't have the official -- there aren't official aggregate gross flow statistics; but we do monitor the leading open-end funds in this category. Again, excluding ETFs, there were about $1.1 billion in net inflows to these funds; and our $412 million in net inflows represent about a 37% market share. Preferred securities in general in the first half of the year had returns of nearly 10%, better than just about every other fixed-income fund out there.

As Matt mentioned, we're in the market in July with a Limited Duration Preferred closed-end fund. We have two major underwriters, BofA Merrill Lynch, and Morgan Stanley. So far, ticketing is going very well, and we expect to price this fund after the close of business a week from today.

Our other major strategies, large-cap value and global infrastructure, are performing well both on an absolute and relative basis, but we have experienced only modest flows into these strategies. We think this is symptomatic of the situation with respect to equity flows generally.

Nonetheless, our open-end fund flows have generated industry-leading organic growth for open-end funds. That has not necessarily been the case with our institutional business.

Our traditional advisory business has been approximately flat; and our subadvisory business, as Matt mention, is where there has been more movement. I just addressed that with respect to Japan.

With respect to our relative investment performance, our real estate strategies have been the only laggards in the Cohen & Steers shop, lagging their benchmarks for the past year. Addressing this has been and remains the single highest priority for our Company, Bob and Joe and me. We have made some important changes in senior leadership recently, and we are in the process of reinforcing our global and US teams. We are very confident that we will be able to turn this around and that we have the proper people and processes in place to do so.

Ironically perhaps, each of our non-real estate portfolios are faring exceptionally well on an absolute and relative basis. Particularly notable is our large-cap value effort, which is now essentially at the top of the performance charts for the year to date as well as still maintaining a strong five-year track record. Our preferred securities and global infrastructure portfolios are handily outdistancing their benchmarks.

I should mention that it is no small part -- a factor in the success of our preferred strategies that our preferred portfolios have beaten their benchmarks in each of the last eight years by a very wide margin, continue to do so this year.

Finally, our open-end Real Assets Fund launched early this year is just beginning to attract (technical difficulty) amounts of capital. Frankly, with slowing economic growth, low inflation, and near-zero interest rates, it is not currently an easy sale. But with so much investor focus on short-term trends, we think it is important -- even more important today to think long term, and we manage our Company thinking in three- to five-year increments.

So when we consider the massive, worldwide monetary easing and fiscal stimulus that is either currently in place or contemplated around the world, it is clear to us that the long-term consequences of this phenomenon are eventual shortages of raw materials, natural resources, commodities, and hard assets. And that is what this fund invests in. At to that the growth of population in emerging markets and the arising middle class just reinforces this assertion. We see this as an investment in our future and a future important leg of growth for our Company.

So in summary, we are very confident that our entire suite of strategies is doing extremely well marketwise. We're beginning to improve our performance in the only lagging strategy that we have in real estate, and we are confident that we will continue to have strong demand for all of them in the coming year. So with that, I would like to stop and take any questions you may have.

(Operator Instructions) Michael Carrier, Deutsche Bank.

Thanks, guys. First question, just on the performance, your long-term performance has been strong. It's been strong for a long time, meaning consistently. The one-year was a bit weak, and then recently the three-year has started to get a little bit weak in certain products. Then when we look at the flows, you see outflows in more products than we've seen in the past.

But I just want to try to maybe parse through how much of that is specific issues, meaning like a lost mandate, that is more unique in nature; versus harder to generate sales given some of the performance in some of the key products. Because it seems like it is a little bit of both, and don't want to look at it as just the performance issue.

Mike, hi, it's Bob. That's a great question, and there is no simple answer, really. Several years ago we had a weak performance in large-cap value; and the last year and a half they have just really had an exceptionally good period. But we lost some money there, but we are not worried about that going forward. Their numbers are so strong and their momentum is terrific.

With respect to REITs, the real softness in performance has been in international. Clearly there has been some cause and effect there in terms of losing accounts.

Beyond that, the flows from Japan are not affected by any performance issues. As Marty mentioned earlier flows there are really a function of levels and directions of distributions.

So, we feel very good about the outlook for large-cap value, given where we are performance-wise there. And as Marty mentioned, we have made some changes on the real estate side. We're extremely confident that performance is not going to be an issue going forward.

Okay, thanks. That's helpful. Then maybe just on the Japan market, you mentioned the dividend cuts or the distribution cuts. Based on what you saw I guess in the past with global, is there a way to try to size that up? Or is it -- in terms of what type of outflows you can see.

And then probably more importantly, it just seems like when you look across markets and products it is hard to find distributions that are anywhere near even a reduced (technical difficulty) level. So it's -- I think being over here and trying to look at different markets, it is always hard to tell like what all would investors go into.

But I don't know if you guys have any sense or not, but just trying to box that in. Or, how much more like accumulated distributions are in REIT funds in that market? Not just yours, but just in general.

Mike, it's very hard for us as well. Actually I was in Japan last week, and this is with many people. I have asked the question, if you reduce the distributions from a very high level to just a high level, where are investors going to go? Well, I didn't get any answers.

So all we can do -- we can't predict flows; we just act as subadvisors and do the best we can. I think it is important to understand that this is a very strong asset class in Japan. In fact I had a direct comment from one of our colleagues over there that Japanese investors love REIT funds. In fact, they think more highly of REIT funds than they do of equity funds. And that is why they -- not just the funds that we subadvise but our competitors have experienced a pretty substantial interest in the funds that we subadvise.

So, there will be short-term fluctuations. These funds are up 15% this year. Investors have had a very good experience.

So hard to predict, and we just do the best we can and manage it. I wish we had more clarity, but it's the same in the United States. It is very hard to predict flows.

Mike, I would simply add that -- also in answer to your question -- our partners in Japan and we are always working together on new products. And we, too, ask the question -- if interest in refunds begins to wane, where is that money going to go?

So we are, as we always are, in deep discussions with our partner there on new products, including non-REIT products. Just as demand for preferred securities here in the United States is extremely strong, we talk to them about products that include preferreds and covered call strategies and things like that.

So, to us this is a broad and ongoing distribution relationship. And our mutual goal is to provide Japanese investors with really solid yield ideas.

Okay, that's helpful. Then I don't know if you hit on it, but just closed-end funds, we have seen a little bit of a pickup. Just your guys' outlook, because you in the past were fairly active in that space, then the environment got rougher. So just maybe the outlook ahead?

You know, we are opportunistic. We have -- the fund we have in the market this month is a Limited Duration Fund, which will have a very strong yield. It seems to satisfy investor appetites today.

So if we have a strategy where we can deliver a good investment, prospective investment results for investors, we will take advantage of that. It is not something that is in our business plan, to do a certain number of closed-end funds every year. We did -- the last fund we did was about a year and a half ago; it was a preferred fund.

It performed extremely well. It was a good raise, and it performed extremely well. Again, opportunistically we will do something if we have the strategy and the market conditions are right.

Okay. Thanks, guys.

Adam Beatty, Bank of America Merrill Lynch.

Good morning. Thanks very much. If I could, just one more on the Japan operations. I appreciate all the color and the commentary you have given so far.

The question is around the distribution cuts in the funds, and just maybe more conceptually the dynamics there. Last year there were some market losses and what have you. So to me it is logical that if you are distributing unrealized gains and you have market losses you have to cut the distribution.

This year, as you mentioned, the absolute returns have actually been quite good. So do you have any sense of what is driving those distribution cuts?

I think what -- I don't know exactly what it is, but I think that the distribution yield was just so high that the prudent thing to do was to reduce it so that it was just in line with other REIT funds. I don't think there was a fundamental issue there.

In fact, I think it is important that they articulated to the investors there that this distribution cut is not the result of any -- there is no suggestion here that the outlook has changed to the negative. On the contrary, it hasn't.

Okay, that's fair. Thank you. Then turning to the institutional advisory, you touched on that business briefly. My sense -- and maybe I lost track a little bit -- that there was still a won but unfunded backlog out there. Is that true right now?

We always have a backlog, and we have shared that with you all when there has been something extraordinary. I think today we are just in that -- we've got a pipeline of accounts that will be funded.

And I think it is probably prudent just to -- it will show up in our statistics when we report them quarterly. There is nothing extraordinary out there that I think we are focusing on.

Okay. Then maybe just a couple quick ones for Matt. Thanks for taking all my questions.

Firstly, on the seed fund gains and losses, I assume a substantial part of that was the Real Assets Fund. Just like to get some color from you if I could on the balance there and what is the glide path for backing off of that seed investment.

Well, it's an open-end mutual fund, so we are consolidating it now because we're over 50%. As Marty mentioned in his points, we're maybe a little ahead of the curve there; it is starting to get some attention. But the economic factors that's going to really make that sizzle are not necessarily in place at this moment in time.

So although we are gathering assets, it is not at the pace that it would be if the economic environment was a little bit different. As soon as we get under 50%, it becomes other comprehensive income, so it's not going to be on the income statement at all. I think we are still a couple of quarters away from that occurring.

Okay. That's very helpful. Thank you.

Then just one last one if I could on the distribution expense. I heard you emphasize that it is on the balance of open-end load funds. It fluctuates somewhat, but it seems like it has been coming down, just as a proportion. I am assuming that that indicates the proportion of load funds coming down. Is that right?

Yes, well, the reason why it is sequentially up is this quarter is our no-load funds. It's essentially that.

And CSR is a $5 billion fund. That is where a lot of our growth has been occurring; and as that growth occurs, the DAP for that fund increases, and that is the majority of the delta.

Great. That's all I had today. Thank you very much.

Mac Sykes, Gabelli & Company.

Good morning, gentlemen. That's actually Gabelli & Company. I was just talking -- you have done a great job with these alternative strategies or the portfolio, the model portfolio strategies. I was just curious if you could give us some color on what you thought the potential was for that business, how you are thinking about that, and then maybe some comment on the margins versus the complex in general.

I'm sorry. You're asking for a comment on which alternative strategies?

I'm sorry, the model strategies. You've had nice growth in that business. I was just curious if you could give us some color on the potential for what you see for that business and maybe some color on the margins in that business versus the complex in general.

Well, as I mentioned, some of the Japanese funds that we manage, when there are inflows, they are going into model-based strategies. But there is also a unit investment trust; we have a couple of ETFs and these SMA and UMA accounts.

So there is not much really to say. They have grown due to what I mentioned earlier about Japanese fund flows, and we just can't predict how they are going to be in the future.

Okay. So should I gather that the growth rates are really being pushed by the redistribution from the Japanese funds, rather than your marketing externally?

To a great extent, that's correct.

Okay. Then should we also expect a slight blip in G&A from the launch potentially next week?

Oh, yes.

Good for you to mention that. There will be some distribution expenses associated with this closed-end fund, and we will segregate those expenses out. But the more success we have the greater the marketing expense, of course.

It could be that our headline number is going to look less attractive than it is actually underlying. But we will separate that out.

Yes, Mac, in my prepared remarks, I didn't hit on that because typically when we've had launches in the past, between compensation agreements and marketing costs, it is in the headline number; but we always put in a release what our earnings would have been without these one-time charges. So yes, they will be in there; but they will be normalized out essentially, and I think it is not really a run rate. What we are really left with on a recurring basis would be the assets that are raised at the fee rate.

Okay. Look forward to that. Just my last question. I'm going to try to ask this, but I think in the last quarter -- or a year ago in the second quarter you talked about the Daiwa relationship of $5 billion in assets in the first half. I was just curious if you'd give us a sense of what the AUM percentage is dedicated right now or not, coming from the Japan region?

We are really not in the practice of segregating out individual relationships and their size.

Fair enough. Thank you.

Thank you. Gentlemen, there are no further questions at this time.

Well, great. Thank you all for listening and we look forward to reporting back to you again after the summer.

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.