Cohen & Steers Inc (CNS) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers Third Quarter 2012 Earnings Conference Call. (Operator Instructions)

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

Thank you. And welcome to the Cohen & Steers Third 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 risk 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 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, which is 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 800-330-7348 for a prospectus.

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

Thank you, Sal. Good morning, and thanks, everyone, for joining us.

Yesterday, we reported net income of $0.23 per share, compared with $0.22 in the prior year and $0.36 sequentially. The third quarter of 2012 included an after-tax expense of $0.21 per share, primarily due to costs associated with the offering of Cohen & Steers' Limited Duration Preferred and Income Fund, a closed-end mutual fund. After adjusting for these items, earnings per share for the third quarter of 2012 would've been $0.44.

Revenue for the quarter was a record $71.3 million, compared with $61.6 million in the prior year and $67.4 million sequentially. The increase in revenue from the prior year was attributable to higher average assets resulting from market appreciation, partially offset by net outflows primarily from sub-advised accounts. Average assets for the quarter were a record $45.2 billion, compared with $42.9 billion in the prior year and $43.6 billion sequentially.

Our effective fee rate for the quarter was 55.7 basis points, up from 55 basis points last quarter. The increase was primarily due to a continued shift in the mix of our assets under management. Open-end and closed-end mutual funds now make up a larger percentage of our overall assets under management.

Operating income for the quarter was $12.2 million, compared with $22.4 million in the prior year and $26.1 million sequentially. Excluding the closed-end fund offering costs, operating income for the third quarter of 2012 was $27.9 million.

Our operating margin adjusted for the offering costs increased to 39.1%, from 38.7% last quarter. The 40-basis point increase was the result of a lower G&A-to-revenue ratio. Pretax income for the quarter was $15.2 million net of non-controlling interest, which represents third-party interests in the funds we have consolidated; compared with $17.6 million in the prior year and $25.1 million sequentially. Excluding the offering costs, pretax income for the third quarter of 2012 was $30.9 million.

Assets under management totaled a record $44.9 billion at September 30th, an increase of $554 million or 1% from the second quarter. The increase in assets under management was attributable to market appreciation of $1.2 billion, partially offset by net outflows of $629 million.

At September 30th, our US real estate strategy comprised 50% of the total assets we managed, followed by global and international real estate at 25%, preferred securities at 9%, large cap value at 8%, and global infrastructure at 7%. Assets under management in institutional accounts totaled $24.6 billion at September 30th, a decrease of $955 million or 4% from the second quarter. The decrease was due to net outflows of $1.7 billion, the majority of which were in global and international real estate strategies from sub-advised accounts, partially offset by market appreciation of $727 million.

If you annualize third quarter flows, institutional accounts had a 26% decay rate. Our open-end funds had record assets under management of $12.5 billion at September 30th, an increase of $414 million or 3% from the second quarter. The increase was due to market appreciation of $250 million and net inflows of $164 million. If you annualize third quarter inflows, open-end funds had a 5% organic growth rate. This marks the 14th consecutive quarter of net inflows into our open-end mutual funds.

Assets under management in closed-end funds totaled $7.8 billion at September 30th, an increase of $1.1 billion from the second quarter. The increase was primarily due to the launch of Cohen & Steers' Limited Duration Preferred and Income Fund, which raised $1 billion including leverage, $889 million of which was raised in the third quarter.

Assets under advisement decreased by $1.7 billion or 14% from the second quarter. The majority of the decrease was from model-based strategies related to net outflows attributable to our sub-advisory business in Japan.

Moving on to expenses -- sequentially, expenses increased 43%. The increase was primarily due to higher employee compensation and benefits, distribution and service fees, and G&A. Excluding the offering costs, expenses were up 5% sequentially.

After adjusting for one-time costs, the compensation-to-revenue ratio remained at 34%, consistent with the guidance we provided on our last call. Distribution and service fee expense included $14.4 million of compensation payments made to the underwriters in connection with the closed-end fund offering. Excluding these payments, distribution and service fee expense was in line with the increase in the average assets of our open-end no-load mutual funds.

G&A includes approximately $411,000 of organizational costs associated with the fund offering. Excluding these costs, G&A came in lower than the guidance we provided on our last call.

On a sequential basis, non-operating income increased $3.9 million net of non-controlling interest. The increase was primarily due to gains from our seed investments in Cohen & Steers' Real Assets open-end Fund and Global Real Estate Long-Short Funds.

Turning to the balance sheet -- our firm liquidity totaled $199 million, the same as last quarter; as cash provided by operations was used to pay for the offering costs. Stockholders' equity was $261 million, compared with $254 million at June 30th.

Let me briefly review a few items to consider for the fourth quarter. Our projected tax rate for 2012 decreased to approximately 35.5% from 36%. The change in estimate is primarily due to lower projected US taxable income resulting from deductable expenses incurred in connection with the closed-end fund offering. The cumulative effect of this change in estimate was recorded in the third quarter, resulting in a tax rate of 32.7%. We expect our effective tax rate for the fourth quarter will be approximately 35.5%.

With respect to compensation -- we expect to record a 34% compensation-to-revenue ratio. And finally, we expect G&A for the fourth quarter to be in line with the third quarter excluding the closed-end offering costs.

Now, I'd like to turn it over to Bob Steers.

Thanks, Matt. And good morning, everyone.

As Matt indicated, the third quarter was strong, if not record-breaking, on many fronts. Record asset management revenues and total assets under management are milestones that we're very proud of and reflect our unique mix of income and real assets, the investments strategies, the diverse and broad reach of our distribution relationships, and solid absolute and relative returns to investors. Strong retail sales momentum in the quarter also helped us reach a record $12.5 billion of retail assets under management.

Turning to performance -- all of our portfolio strategies delivered positive returns in the quarter. Our international REIT portfolios led the way, with a return of approximately 9.8%. This marks a potentially significant turnaround for the stocks of real estate companies located outside the US, which have more recently been challenged by soft economic conditions.

As most of you are aware, our preferred securities portfolios have experienced meaningful asset growth this year, and investment performance remains very strong. Returns for the last quarter and 12 months are 7% and 23% respectively. As importantly, our preferred returns have exceeded their respective benchmarks for the latest 12 months by over 500 basis points and, for the past eight consecutive years, by an average of more than 330 basis points per year -- a truly remarkable record of performance.

US REITs took a breather in the quarter, with modestly positive returns, while Global Listed Infrastructure and Large Cap Value posted solid increases of 5.4% and 6.1% respectively. Our newest fund, Cohen & Steers Real Assets Fund, in only its second full quarter of existence, delivered a very strong 7.6% return, slightly exceeding its benchmark. We believe this strategy in particular is very well positioned for the environment that we anticipate for at least the next five years.

With regard to asset flows -- the value of having diverse global retail and institutional distribution partners was never more evident than in the latest quarter. Even as we continue to experience institutional net outflows, mainly related to our sub-advised REIT funds in Japan, our Retail Sales Group generated strong open-end fund sales while simultaneously raising $690 of equity for our Limited Duration Preferred Securities Fund, which with leverage is now over $1 billion.

Open-end fund flows increased to $1.2 billion in the quarter, a 13.8% increase from the prior quarter. Our Preferred Securities and US REIT Funds led the way with strong gross and net inflows. And, as I already mentioned, retail assets under management are now at a record $12.5 billion and growing.

On the institutional side, the environment has been more challenging, with the result being net outflows of $1.7 billion in the quarter. Of that amount, approximately $1 billion was attributable to our sub-advisory business in Japan, with the balance resulting from the termination of four separate accounts.

As we've discussed in the past, the outflows from Japan are not performance-related but stem from reduced levels of fund distributions. The majority of our outflows in the quarter were from our US REIT portfolios in Japan, which reduced their distribution levels in July. And not surprisingly, there's a direct correlation between distribution cuts and outflows.

That said, the appetite for US for REIT funds in Japan is still very strong. And in fact, in the quarter, there was over $2 billion of inflows into the US funds away from Cohen & Steers.

We've just returned from Japan, where we've been having very productive meetings to ratchet up our joint marketing and sales efforts aimed at mitigating the current outflows, which I believe, given the current favorable market environment there, is readily achievable.

With regard to the separate account closings -- they were a result of under-performance in our global REIT strategy, and specifically under-performance in Asia. To address this issue, earlier this year we implemented a number of changes, including the addition of experienced senior portfolio management to our team in Hong Kong.

Lastly, since quarter end, mandates in excess of $115 million have funded, which still leaves $320 million of mandates won but still unfunded. The pipeline of RFP activity, which has been soft for much of the year, appears to be improving, which potentially bodes well for next year.

At the end of the day, we're convinced that our suite of real asset and income-producing equity strategies is well positioned for the environment today, and especially looking to the future. In addition, the substantive measures that we're implementing to remediate our investment under-performance in Asia and to reverse the outflows in Japan give us confidence that we will achieve the desired results. We like where we're currently positioned, and we're as optimistic as ever in our future growth prospects.

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

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

First, a question on the assets under advisement, and I guess some of the outflows there -- more broadly, how well does that track with the sort of regular sub-advised accounts, in my mind? It seemed as though assets were growing pretty rapidly -- not sure whether that was flows and/or market -- but then reversed a little bit. How should we think about tracking that going forward?

Well, the bulk of the assets under advisement are also the sub-advised assets from Japan. And in fact, the majority of that are US REIT portfolio. So you should think of that portion of the assets under advisement behaving roughly the same as our traditional Japanese assets under management.

Got it.

Can you give us any color on the fee rate differential between the model-based strategies and the other sub-advised?

We really don't comment on fee rates. But there wouldn't be much of a difference there.

That's helpful, I appreciate it.

And then, turning toward the report you guys provide on a monthly basis of the US open-end gross and net flows, which is great -- how would you characterize the difference between that and sort of the overall open-end portfolio? There was a bit of a divergence in the month; maybe in the quarter.

Yes. I think it's over 90% of the vehicle. The difference is really that we've got some [C kevs] in Europe that roll up to open-end funds for reporting purposes that we don't include in that monthly, which is provided mostly for the utilities to pick up our US flow. So we exclude the C kevs. That's the biggest difference.

Okay. Are they concentrated in different strategies?

Not really.

Not especially? Okay. That's helpful.

And then, just one last one -- just on the current level of the RMZ -- it looks like we've had a bit of a modest correction. Do you feel like that's a warranted kind of pullback? Is it an opportunity right now? Or, what are your thoughts, just in general, on the REIT market?

Look, it's hard to comment -- and we won't comment on whether we think the RMZ is correcting or not. But we'll make some comments about where we're at in the real estate cycle, and the fundamentals for real estate securities. The short answer is we're at a very good point in time in the real estate cycle.

What's different this time compared with last real estate cycle -- and this is concentrated in [a comment] concentrated on the US -- is that we've had very little supply for a very long time. So even though the economic recovery has been slower than it's been in the past, that's resulting in very strong fundamentals. So that's a good starting point. You add onto that what these companies can do in terms of deploying capital and making acquisitions, and financing that with very attractive cost to capital -- it's resulted in earnings growth that's in the 8% to 10% range.

So the fundamental picture is very good. The stocks have performed very well. What has broadened the investor interest in REITs is the fact that they have decent current income, but also they can perform well in inflationary environments. So investors who are concerned about money printing and the after effects of that have been drawn to real estate and REITs as a liquid option for that.

I would just add -- this is purely anecdotal, this is not technical -- but I just came back from a few weeks in Asia. And essentially, the impression that I get is that the US economy -- and more specifically, the US real estate market -- is viewed as the most attractive real estate market in the world right now. Europe has fundamental issues. Various different markets in Asia are dealing with their own economic and risk factors.

And to me, the sentiment in Asia was overwhelmingly US real estate represents the best risk-return proposition going in the real asset category.

That's helpful. Thank you very much for all the color. That's all I had today.

Jeff Hopson, Stifel Nicolaus.

Two questions -- one, the mutual fund flows -- more recently, we've seen a little bit of deterioration in the reclose, and then improvement in the preferred. Is that something that you think is kind of a new trend, number one? Number two, in terms of the RFP that you spoke about -- it sounds like there's been some pickup. So as you kind of look at your RFPs and/or finals, et cetera, any sense of change of the nature of the interest by account, type, et cetera?

This is Marty -- I'll answer those questions.

But taking the second question first -- the RFP cycle is somewhat seasonal. And now, as we're approaching the end of the year, there was a big lull where nothing was happening, and now we're seeing RFPs in pretty much of all of our strategies, but primarily real estate. But also, we've seen some infrastructure RFPs and growing interest in our preferred strategies.

With respect to the inflows and outflows in real estate -- actually, the US real estate flows have been pretty steady, notwithstanding some seasonality to them. We seem to have net inflows pretty much every quarter in US strategies. We've had outflows in our international, and that's probably somewhat performance-related. And the real interest -- and I think it's a combination of the interest rate environment and our -- really, as Bob mentioned, this terrific track record we have in preferred -- that has been our strongest inflow strategy for pretty much the last six months.

Okay. And on that preferred fund, would you say anything has changed in terms of distribution? Or is it just a continuation of the recognition of it being a solid product?

On the preferred fund -- no, we're pretty much in every channel there. I think -- there's not been any change in distribution. The RIA market was a little slower to adopt this strategy than the BD market. But they both remain pretty strong.

Thank you.

On the US REIT question, by the way -- if you look at our gross flows, they're actually extremely high. The demand for US REIT strategies remains high, whether it's here or in Japan. We had a commensurate uptick in outflows. We still had net inflows in total in US REIT funds. But there may have been some profit-taking in the quarter, because they've performed well.

Okay, thank you.

There are no further questions at this time.

Great.

Well, thanks for dialing in this morning, and we look forward to speaking to you in the new year. Thank you.

Ladies and gentlemen, that does conclude today's Conference Call. We thank you for your participation and ask that you please disconnect your lines.