Cohen & Steers Inc (CNS) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Cohen & Steers fourth-quarter 2012 earnings 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, January 24, 2013.

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 fourth-quarter and full-year 2012 earnings conference call. Joining me is our Co-Chairman and co-Chief Executive Officer, 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 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 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 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. This presentation will also contain information about funds that have filed a registration statement with the SEC which have 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 800-330-7438 for a prospectus.

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

Thanks very much, Sal. Good morning, everyone, and thanks for joining us today.

Yesterday we reported net income of $0.49 per share compared with $0.36 in the prior year and $0.23 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 were $0.44.

Revenue for the quarter was $71.1 million compared with $59.4 million in the prior year and $71.3 million sequentially. The increase in revenue from the prior year was attributable to higher average assets under management resulting from market appreciation, partially offset by net outflows, primarily from sub-advised accounts. Average assets for the quarter were $44.9 billion compared with $40.3 billion in the prior year and $45.2 billion sequentially.

Our effective C rate for the quarter was 56.3 basis points, up from 55.7 basis points in a sequential quarter. The increase was primarily due to a currency adjustment.

Operating income for the quarter was $32.7 million compared with $22.8 million in the prior year and $12.2 million sequentially. Excluding the closed-end fund offering costs, operating income for the third quarter of 2012 was $27.9 million.

Our operating margin increased to 46% from 39.1% last quarter after adjusting for the offering costs. The margin expansion was primarily due to lower compensation and benefits. Pretax income for the quarter was $33.9 million net of non-controlling interest, which represents third-party interest in the funds we have consolidated, compared with $25.2 million in the prior year and $15.2 million sequentially.

Excluding the offering costs, pretax income for the third quarter of 2012 was $30.9 million.

For the year, we reported net income of $1.49 per share compared with net income of $1.23 per share last year. The 2012 results included the closed-end fund offering costs. After adjusting for these items, earnings per share were $1.70 for 2012.

Assets under management totaled a record $45.8 billion at December 31, an increase of $852 million or 2% from the third quarter. The increase in assets under management was attributable to market appreciation of $1.2 billion, partially offset by net outflows from $339 million.

For the year, assets under management increased $4.5 billion or 11%. The increase was due to market appreciation of $7.1 billion, partially offset by net outflows of $2.6 billion.

At December 31, our US real estate strategy comprised 49% of the total assets we managed, followed by global and international real estate at 24%, preferred securities at 10%, global infrastructure at 8% and large-cap value at 8%.

Assets under management and institutional accounts totaled $24.9 million at December 31, an increase of $206 million or 1% from the third quarter. The increase was due to market appreciation of $745 million, partially offset by net outflows of $539 million, the majority of which were in global and international real estate strategies from sub-advised accounts.

For the year, assets under management decreased $530 million or 2%. The decrease was due to net outflows of $5.1 million from global and international real estate and large-cap value strategies from sub-advised accounts, partially offset by market appreciation of $4.5 billion.

Institutional accounts had a 20% decay rate for 2012.

Our open-end funds had record assets under management of $13 billion at December 31, an increase of $434 million or 4% from the third quarter. The increase was due to market appreciation of $349 million and net inflows of $85 million, marketing the 15th consecutive quarter of net inflows into open-end mutual funds.

For the year, assets under management increased $3.3 billion or 35%. The increase was due to market appreciation of $1.9 billion and net inflows of $1.5 billion. Our 2012 organic growth rate for open-end funds was 15%.

Assets under management in our closed-end funds totaled $8 billion at December 31, an increase of $212 million or 3% from the third quarter. For the year, assets under management increased $1.7 billion or 27%. The increase was due to the launch of Cohen & Steers Limited Duration Preferred and Income Fund, which raised $1 million including leverage and market appreciation.

Assets under advisement decreased by $1.2 billion or 12% from the third quarter. The majority of the decrease was from model-based strategies related to net outflows attributable to our subadvisory business in Japan.

Moving to expenses, on a sequential basis, after adjusting for the offering costs last quarter, expenses were down 12%. The decrease was primarily due to lower employee compensation and benefits.

The fourth quarter reflected the cumulative effect of an adjustment to incentive compensation. The adjustment was primarily due to senior management maintaining its incentive compensation mix, which resulted in a larger portion of its compensation being paid in the form of restricted stock units than what was contemplated during the first nine months of the year.

The adjustment for the compensation to revenue ratio to 32.4% for the year, 160 basis points lower than the guidance we provided on the last call.

On a sequential basis, nonoperating income increased $1.8 million net of noncontrolling interest. The decrease was primarily due to lower returns from our seed investments.

Now, turning to the balance sheet, our firm liquidity totaled $175 million compared with $199 million last quarter. Stockholders equity was $217 million compared with $261 million at September 30. The sequential decline in firm liquidity and stockholders equity reflect the special dividend payment in December of approximately $66 million. We remain debt free.

Let me briefly discuss a few items to consider for 2013. Based on our preliminary projections, we estimate that our effective tax rate will increase to 37% for 2013. The higher tax rate is primarily due to increases in certain state and local taxes. As a reminder, when we calculate our effective tax rate, we adjust for noncontrolling interest. With respect to compensation and benefits, we expect that our compensation to revenue ratio will approximate 32%.

G&A will include the full year's impact of extending our lease at 280 Park Avenue, higher business related travel, including increased trips internationally, and an increase in fund reimbursement costs. As a result of these, we expect G&A to approximate 15% of revenues in 2013.

And finally, we expect our effective fee rate will be between 56 and 57 basis points.

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

Great. Thanks, Matt, and good morning, everyone. Before I start with my comments, you may have noticed that Marty is not with us on the call today. Unfortunately he contracted a severe case of the flu and is home in bed. We wish him a speedy recovery, and I expect he'll be back in the office tomorrow or Monday.

I'm going to run through the usual update on investment performance and asset gathering and then just wrap up with a few thoughts about the important trends that we are seeing and expecting for the coming year.

First off, investment performance in the fourth quarter was really strong, and we are very pleased about that. Starting with the REIT space, our global and international strategies, which had previously been lagging, had a very strong fourth quarter, beating their benchmarks by 107 and 157 basis points, respectively. As you probably recall, we reorganized our global real estate team early last year, and we've been seeing steadily improving investment performance ever since.

US REITs performed about in line with their benchmark, and our global long short strategy had a solid fourth quarter and finished the year with a 13% total return.

As we've come to expect, our preferred securities team generated outstanding returns for the quarter, up 3.8%, beating the benchmark by over 150 basis points. Even more impressive is that this is the ninth consecutive year of relative outperformance. Bill's team beat their benchmark by over 580 basis points while generating a 23% return for the year.

Global infrastructure also had another strong quarter, up 3.6%, and beat their benchmark by over 110 basis points. For the year, the team's 15.4% total return represented over 360 basis points of outperformance.

Lastly, our new Real Assets Fund performed roughly in line with its benchmark and was down slightly in the quarter.

The bottom line is this was a quarter of extremely good performance across our core strategies, and our expectation is that the rebound in both the global and international real estate strategies will mark the beginning of a sustained turnaround in relative performance there.

Moving to institutional asset flows, I'd like to start by updating you on current trends that we're seeing in Japan. As you may already know, virtually all US and global REIT funds have now reduced their distributions at least once with Fidelity being the most recent. This has leveled the playing field for us in competing for new assets. Investment performance remains strong in the funds that we manage for Daiwa, and the weak yen has also helped.

While we're still experiencing net outflows, the good news is they're tending materially lower each month. In addition, our sales team is ramping up marketing support efforts, primarily focused on retail seminars with Daiwa and Daiwa Securities, which should also help facilitate new fund flows.

Looking at the rest of the institutional marketplace, the outlook is improving. We added four new separate accounts totaling $133 million in the quarter, and we had no separate account losses, which is encouraging. So virtually all of our net outflows in the quarter were from Japan, and we still have $370 million of awarded but underfunded mandates in the pipeline.

Turning to retail sales, flows overall are very strong and, in fact, are accelerating. For the year, broker-dealer growth sales grew by 43%, and net inflows rose by 40%.

Importantly, we saw strong net inflows into multiple fund strategies, including US REITs, preferred securities and real assets. Closed-end fund assets under management increased by 27% as well, and we continued to be optimistic about investor demand for closed-end funds.

Let me finish up with a couple of parting thoughts regarding the outlook. First, while outflows from Japan are declining on their own, we are also committing additional manpower in support of our partners and adding to our senior staff in the Tokyo office.

Second, although our institutional business was basically flat in the fourth quarter, last year retail open-end fund flows were robust and are accelerating. In addition, the closed-end fund window remains wide open, and we're hoping to launch two new funds this year. We've already filed a prospectus for a new fund to invest in MLPs and hope to be in the market soon.

Third, perhaps most importantly, we believe that liquid real asset investment strategies are positioned at the forefront of a rising tide of investor interest based upon the expectation of a global economic recovery.

Last year, the index returns from emerging market real estate securities was 42%, index returns from international real estate securities was 38%, global real estate securities generated 28% and institutional preferreds 21%. Today the nation's leading endowment funds have 20% to 30% of their portfolios allocated to real asset strategies, which includes real estate securities, along with commodity futures, natural resource equities and other diversifiers.

This is precisely what our funds, including our newest fund, Cohen & Steers Real Assets Fund, delivers. The point is that long-term liquid alternative strategies like Real Assets are where the investment world and capital flows are heading. The strong investment return from these strategies are already signaling that, and it's our goal to be the leader in this space.

I'm going to stop there and ask the operator to open it up to questions.

(Operator Instructions) Jeff Hopson, Stifel Nicolaus.

Hey, thanks a lot. So, just a couple of questions. On the US real estate, you did have outflows. Were those related to Japan as well? And you mentioned about the real asset issue. Just kind of curious, as investors look at mixed issues, I guess, one real asset is on the positive side, dividend yields attractive, but what about concern of the rates? How are investors, would you say, kind of looking at all those issues in total?

Well, real assets are of interest to investors because they tend to perform -- they tend to outperform in an environment where you see economic expansion along with rising inflation and interest rates.

US REITs, for example, historically have had virtually zero correlation to rising rates. So if rates are rising because of the global economic expansion, that's probably the single most positive variable that affects real asset.

So, we don't see rising interest rates as being problematic for real asset strategies. They are certainly problematic for virtually all fixed income strategies and probably would not be a positive long-term for our preferred fund, but our other real assets strategy would probably be significant beneficiaries of that.

Okay. And the US real estate outflows, which are modest I guess, but was that coming from Japanese products as well?

Yes, I mean we had inflows into our US REIT fund domestically. The outflows are strictly from Japan.

Okay.

Demand for US REIT on the part of US investors remains high.

Okay. And preferred securities flows were down. I'm assuming that some of the perhaps interest or focus was on the closed-end fund; is that fair?

No, I don't think so. This is just my opinion, but I think in late in the fourth quarter I think we saw some not insignificant profit taking, investors booking capital gains in advance of rising tax rates, and we saw that, I think, both in real estate. But, you know, in a year where preferred securities generated returns in excess of 20% late last year, I think we had some profit-taking.

Okay. Thank you.

Adam Beatty, Bank of America Merrill Lynch.

Thank you and good morning. Just a question about the retail sort of environment in Japan. Especially given that you have some folks over there doing seminars, I know top management has made some trips. Appreciating that, with distributions kind of on an equal footing at this point, how would you characterize retail demand for real estate versus other types of listed securities?

That's a great question, and I recently got an update on that. The reception and these seminars are mainly with the ultimate investors, real retail not intermediaries, and the interest in REITs is still very high. But as you can imagine, the investors are focused mainly on how sustainable the current level of distributions are. They have come down quite a bit, and frankly, the appreciation in the securities in addition to the weakness of the yen has made those dividends more sustainable and more solid.

So, you know, I would say interest is still high. The yields are still very attractive, and there aren't a lot of alternatives over there. And frankly, the fund distributors there really haven't been able to identify and exploit strategies that are more popular than REITs. So they're still among the best-selling funds over there.

Great. That's interesting color. Thank you. And then turning to the global real estate strategies, maybe a two-part question. One is, in terms of the improving performance, is there a certain way that they've been positioned recently that has done especially well? And then looking forward, looking across the globe to different regions and what have you, where do you see the opportunities right now?

Well, this is Joe Harvey. Bob mentioned earlier the reorganization that we executed last year to make Jon Cheigh the head of our global team, and we've made some additions in other personnel, a portfolio manager and an analyst, in Asia. So we think that the decision making has improved by virtue of the players and, more specifically, our -- we've been overweight in the Asia region, and that has been among the best performing. That's been a big contributor to the performance. But I'd say there are no major changes, just better day-to-day decision-making that resulted from a change in the team.

Just in terms of where we see the opportunities today, you know we're at a good point time in the real estate cycle and just about every region of the world because we've had a significant easing by central banks around the world, and now with China starting to improve on an economic front, things are looking good fundamentally. We still like Asia regionally; Europe, still not out of the woods but out of the crisis mode; and in the US, fundamentals are very, very strong for real estate securities.

That's great. Thanks very much, Joe. One more, if I could. Thanks for taking all my questions. Just in terms of the comp guidance for the coming year, is the little bit of a step down entirely due to the shift in mix towards restricted stock, or is there something else going on there?

No, I think -- look, we would have had margin expansion from a lower comp ratio just by virtue of modeling in higher revenues for 2013. But during the first nine months of 2012, we were assuming a certain mix, and as the year end got closer, we decided not to embrace that. So stock is an important component of compensation for our senior people, and we elected to stay the course of the last few years in that regard.

So all that did was accelerated what would have been some lower comp ratio anyway, and even though we finished at about [32.5], we are thinking for 2013 it would be [32].

Adam, if I could also just add some strategic or philosophic color to that. As you can piece together from the year we've had, though we finished with respect to investment performance on a very strong note and I would add that it's carried over into this year, but it was our judgment that the majority of the improvement -- not all of it, but the bulk of the improvement -- in our financial results were mainly beta and not as much alpha as we expect. And so as a result, we've tried to be extremely disciplined in our approach to year-end compensation. I think maybe in years gone by, managements in the industry might have been willing to pass on the financial benefits of the beta rally, but industry is facing tougher fundamentals. And you know when there is alpha generation, then we should all be rewarded for that. But if it's mainly beta, then that shouldn't flow through. That was sort of the overarching philosophy behind compensation.

Got it. Thank you very much for the additional comments. That's all I had today.

Thank you. Gentlemen, there are no further questions at this time. I'll turn the call back over to you. Please continue with your presentation or closing remarks.

Great. Well, thanks again for joining us this morning, and we look forward to speaking with you after the first quarter. Thank you.

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.