Cohen & Steers Inc (CNS) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the first-quarter 2013 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, the conference is been recorded Thursday, April 18, 2013. I would now like to turn the conference over to Sal Rappa, Senior Vice President. Please go ahead, sir.

Thank you, and welcome to the Cohen & Steers first-quarter 2013 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 Factor section of our 2012 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 more 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. Good morning, everyone, and thanks for joining us this morning. Yesterday, we reported net income of $0.34 per share, compared with $0.41 in the prior year, and $0.49 sequentially. The first quarter of 2013 included an after-tax expense of $0.10 per share, primarily due to costs associated with the offering of Cohen & Steers MLP Income and Energy Opportunity Fund. After adjusting for these items, earnings per share would have been $0.44. Revenue for the quarter was a record $72.5 million, compared with $63.7 million in the prior year, and $71.7 million sequentially. The increase in revenue from the prior year was attributable to higher average assets, resulting primarily from market appreciation, the launch of two closed-end funds, and net inflows into open-end funds. Average assets for the quarter were a record $47.4 billion, compared with $43 billion in the prior year, and $44.9 billion sequentially.

Our effective fee rate for the quarter was 55.9 basis points, down from 56.3 basis points in the sequential quarter. The decrease was primarily due to a decline in the value of the yen, partially offset by a continued positive shift in the mix of our assets under management. Operating income for the quarter was $20.7 million, compared with $25.4 million in the prior year, and $32.7 million sequentially. Excluding the closed-end fund offering costs, operating income for the first quarter of 2013 was $28.5 million.

Our operating margin, adjusted for the offering costs, decreased to 39.4% from 46% last quarter. The decrease was primarily due to lower compensation and benefits last quarter, resulting from the cumulative effect of an adjustment to incentive compensation, and higher distribution and service fee expenses this quarter. Pre-tax income for the quarter was $23.3 million, net of non-controlling interest, which represents third-party interest in the funds that we have consolidated, compared with $28.2 million in the prior year, and $33.9 million sequentially. Excluding the offering costs, pre-tax income for the first quarter of 2013 was $31.1 million. Assets under management totalled a record $49.3 billion at March 31, an increase of $3.5 billion, or 8%, from the fourth quarter. The increase in assets under management was attributable to market appreciation of $2.8 billion, and net inflows of $773 million, marking the first time since the third quarter of 2011 that we recorded overall positive net flows.

At March 31, our US real estate strategy comprised 50% of the total assets we managed, followed by global and international real estate at 23%, preferred securities at 10%, global infrastructure at 9%, and large cap value at 8%. Assets under management in institutional accounts totalled $26.1 billion at March 31, an increase of $1.2 billion, or 5% from the fourth quarter. The increase was due to market appreciation of $1.6 billion, partially offset by net outflows of $344 million from global and international real estate strategies, primarily from sub-advised accounts. The net outflows from sub-advised accounts is the lowest we have recorded since the fourth quarter of 2011, when we first started to experience net redemptions. If you annualize first-quarter flows, institutional accounts had a 6% decay rate.

Our open-end funds had record assets under management of $14.4 billion at March 31, an increase of $1.5 billion, or 12%, from the fourth quarter. The increase was due to market appreciation of $826 million and net inflows of $659 million. This marks the 16th consecutive quarter of net inflows into open-end mutual funds. If you annualize first-quarter flows, open-end funds had a 20% organic growth rate. Assets under management in our closed-end funds totalled $8.8 billion at March 31, an increase of $808 million, or 10% from the fourth quarter. The increase was due to the launch of Cohen & Steers MLP Income and Energy Opportunity Fund, which raised $458 million, excluding the greenshoe in leverage, and market appreciation. Assets under advisement decreased $684 million, or 8%, from the fourth quarter. The decrease was due to net outflows from model-based strategies attributable to our business in Japan.

Moving to expenses, on a sequential basis, expenses increased 35%. 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 14% sequentially. After adjusting for compensation costs associated with the closed-end fund launch, the compensation-to-revenue ratio for the quarter was 32%, consistent with the guidance provided on our last call. Distribution and service fee expense included $7.2 million of compensation payments made to 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 mutual funds. And the increase in G&A was slightly lower than the guidance we provided on our last call.

On a sequential basis, non-operating income increased $1.4 million, net of non-controlling interest. The increase was primarily due to higher returns from our seed investments. Turning to the balance sheet, our firm liquidity totalled $166 million, compared with $175 million last quarter. Our stockholders' equity was $223 million, compared with $217 million at December 31, and we remain debt-free.

Let me briefly discuss a few items to consider for the second quarter and the remainder of 2013. Our effective tax rate this quarter was 35%, which was below the 37% we estimated. The lower effective tax rate was primarily due to lower projected US taxable income, resulting from deductible expenses incurred in connection with the closed-end fund offering, as well as some discrete items. We expect that our effective tax rate for the remainder of the year will approximate 37%. With respect to compensation and benefits, we expect to maintain a 32% compensation-to-revenue ratio. And, finally, we expect G&A to approximate 15% of revenue for the second quarter. As a reminder, G&A includes 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. Now let me turn it over to Marty Cohen.

Thank you, Matt. It has been a very busy period for our Company so far this year. Like most asset managers, we have enjoyed strong market tailwinds. Unlike some managers, nearly all of our strategies are attracting strong interest, and that's beginning to translate into good flows. This includes retail, which, as Matt discussed, has enjoyed very strong organic growth, but also the institutional, where, despite outflows from some sub-advisory accounts, we are seeing strong interest globally.

As we have discussed before, the asset classes that we offer are deliberately chosen, and, for us, very timely. In the slow-growth, low-interest-rate environment that has persisted, and looks like it may continue to persist, we have found that a number of trends have remained in our favor. First is that real estate continues to be an attractive proposition, due to its relatively high yield and the ability of our companies to finance asset purchases and refinance their balance sheets at extraordinarily low interest rates. We think the investment world at large underestimates the power of this environment.

The REIT dividend story -- the REIT dividend growth story remains as strong as ever. For example, so far in 2013, 63 North American REITs have already raised their dividends, many by a meaningful amount. I should mention that our flagship, Cohen & Steers Realty Shares Fund, is the nation's largest actively-managed open-end real estate mutual fund.

Preferred securities have been our fastest-growing asset class, due to their exceptional yield and their often-complex structure that can make investing in individual issues somewhat tricky. Preferred securities in the past 12 months have increased to 10% of our total assets under management, from 5%. We now manage the second-largest actively-managed, open-end preferred securities mutual fund in the nation, and it is barely three years old. Listed infrastructure, which we define to also include master-limited partnerships, offer above-average yields that also have the potential to grow their distributions. This asset class has increased its share of our AUM to 8.5%, from 7% year ago.

In addition to our recent closed-end funds, we are also seeing very strong interest from the institutional community globally, and there is a strong and growing pipeline of RFPs out there, representing good potential future mandates. It appears that the window for closed-end funds is wide open again. The ability to assemble a portfolio of relatively high-yielding investments, and use a prudent amount of what is now extremely low-cost leverage, is understandably very popular. These funds are broadening their appeal to a range of financial advisors and their clients, and we are at work on new investment portfolios that could potentially be offered at some time in the future.

Cohen & Steers is the sixth largest manager of closed-end funds in the nation. Importantly, all of our recent offerings are trading above their IPO prices, as well as their net asset values. We are pleased to report that investment performance has improved in nearly all of our strategy, and that certainly has helped our current positioning. On the flip side, large-cap value has had a declining share of our total AUM, and we have had no meaningful net flows either way. Global and international real estate has also diminished, due to net outflows and weaker appreciation.

As we announced recently, we have further strengthened our commitment to alternative and real assets, and have brought on a very talented commodity management team that had previously been with GE Asset Management. We expect to offer their investment expertise in a variety of channels, from standalone portfolios or separate accounts for institutions, to integrated multi-asset portfolios. Frankly, commodities have not been that popular, particularly lately -- in fact, particularly this week -- but they do provide meaningful portfolio diversification. Further, we remain convinced that the ultimate consequences of massive fiscal and monetary stimulus will be inflation and economic growth that will absorb any excess supply of many natural resources. We view this as an important investment in our future.

With respect to our business in Japan, as Bob reported last quarter, outflows have abated in US real estate, and are now beginning to abate in global real estate. Though not yet positive, total outflows are the lowest in over a year, and there are some preliminary signs that may [make] turn positive as Japanese investors seek both income and non-yen denominated assets. We have established a very strong brand in Japan, where we have now been working for nearly 10 years. We are reinforcing our presence in Japan and adding senior professionals with the objective of broadening both our distribution and investment offerings. We are very encouraged by our prospects for asset gathering, not only in Japan, but also in greater Asia.

In closing, we view 2013 as a year in which we will be investing heavily in our future. Notwithstanding strong and extremely disciplined financial -- being strongly disciplined financially, we understand the need to reinforce our infrastructure and expand our investment sales and support efforts. Our real asset efforts are in high gear, and we are also exploiting the potential of each of our existing strategies. We think that, as the marketplace shifts to equity investments and alternative assets, we expect to be well-positioned to meet investor needs. With that, I will be happy to open it up to any questions.

(Operator instructions) Macrae Sykes, Gabelli & Co.

Hi, good morning, gentlemen. Just a couple of quick things. I was wondering if you could provide us some color on the model-based strategies. I saw the AUM dip this quarter. So what is the outlook there? Any visibility on that business?

I'm sorry, on what strategy?

The model-based portfolios on the assets under advisement.

You know, Mac, we don't really provide guidance on that. I think we've seen in the model base that there was a decline, and in the other two categories we had slight increases, both in ETFs and our unit investment trust business. We have said in the past that the majority of what we have been experiencing in the model base on a net basis relates to the business in Japan. I think we have seen some deceleration in that, both in the assets under management and the assets under advisement. But we don't really give guidance on that, because we are just a sub-advisor in that relationship. We have had -- in the UMA channel, we have had some positive inflows from some of our other partners there, but the majority of that difference for this quarter is the Japanese relationship.

Got it. The closed-end fund that was launched recently -- I expect, if you go to 30% leverage, what would be -- is there any sort of visibility on the timing of that? Might it be sooner rather than later, or just depends on market conditions? Just sort of understanding the flows.

Well, it is like any IPO, where the underwriter has a green shoe option, which would take up to 45 days. Then, typically, we would set the leverage once we know the total size of the fund would be.

Okay got it.

So think of it, second part of this quarter, we would get green shoe-in leverage. The fund was launched at the end of the first quarter, so there's really no fee income from that. And the fee income in the second quarter will be weighted, more at the current level for the first half, and then the increase for the second half and the second half of the year.

Okay. And then, if we exclude the impact from the yen on the average fee rate for the firm, what that number be?

It was included in the [R&M]. That is what we had a decline, despite the positive --

He asked what it would be if we excluded it.

It would probably be higher. It would be higher by a basis point, a little over a basis point.

Okay perfect. Thank you.

(Operator instructions) Adam Beatty, Bank of America.

Thank you and good morning. Just a follow-up on the question about assets under advisement. Could you give us -- maybe even just ballpark -- how many strategies are in each of the three buckets that you report? Like how many ETFs, for example, in the ETF bucket?

There is one -- the major one is our i-shares. That is the overwhelming majority.

Okay. Got it.

But I think we have the total. But the one is the dominant one.

Okay.

For UMA --

That is ICF, which is $3 billion. (Multiple speakers)

Right. And in the UMA, we have REITs, global REITs, infrastructure, and preferreds.

Okay.

So we have most of our strategies in those channels.

Got it. Okay, that's very helpful. I appreciate it. And then, on the hot topic, in terms of REIT flows in Japan. Some of the qualitative commentary, which seems to indicate that there's been a bit of a stampede back in, having been out for a while, frankly, your sort of gradual improving trend, I think, is probably healthier. But, number one -- are you seeing a retail stampede? And if so, what is driving that? People say low yields, and I guess low yields in Japan, to me, is not new news. So just any commentary around REIT flows in Japan.

I would make a couple of comments. And you touched on one of them in your question, and that is -- the characteristics of flows in Japan do vary, depending on the type of distribution you have and the distributor that you have. And so, whereas the distributors that are comparable to the wire houses here in the States have much higher velocity of flows in and out, whereas bank distribution is much more measured, both in and out. And, while we have exposure to both, the preponderance of our assets has been distributed through regional banks.

Now that said, I think investors -- it is hard to generalize, frankly, about what is going on in Japan. I think there's a lot going on. There is change in sentiment. There seems to be a lot more optimism about investing in a broad range of things. But certainly, income-oriented, non-yen denominated investments, like US REITs, look particularly good with the acceleration of the yen's decline. So, the flow trends are very favorable and improving. And so, we are trying not to get too optimistic about the prospects for the rest of the year, but certainly the momentum is moving back in our favor.

Got it. That is very helpful. Thank you. And then, a little bit on, maybe, the institutional advisory side. Yesterday, the IMF had a report out talking about pension funds -- and again, probably not new news -- how particularly about how underfunded pensions are sort of stretching for yield and/or capital appreciation. Just your view on that. It sounds like the RFP channel -- pipeline -- is strengthening, which is good. How you see a higher-yielding securities like REITs, like infrastructure playing into that, and also, on the supply side, any movements you are seeing in terms of more public listing of those types of securities.

Well, with respect to institutional demand for REITs and similar portfolios, I would say that there, too, we are seeing a gradual improvement in the level of interest and the pipeline. As you may recall, up until about three or six months ago, in our global and international strategies, we were in the penalty box because of underperformance. Our performance in the last six or nine months has improved substantially. So, there, too, we are becoming more optimistic. Those accounts that might have been on watch list are not on watch list anymore. And we are seeing additional interest there. We are particularly seeing an improvement in interest in listed infrastructure, institutionally, and, frankly, even preferreds, which heretofore have not been an investment strategy that was widely embraced by the institutional marketplace.

I can answer the second part of the question, which is -- what are we seeing in terms of the markets manufacturing new securities that fit into the strategies? I would note three different areas. The first is in the preferred area. It is probably among the most dynamic, and that is being driven by the changes in the regulatory environment for financials, in particular banks. And it is happening on a global scale. So we are seeing significant new issuance of preferreds. In some cases, it is refinancing to take out old preferreds and lower coupons. But in other cases it is to help build capital to meet the new regulatory requirements. So that is very exciting to us, and very dynamic.

The secondary would be in infrastructure, where we are seeing a lot of activity, particularly in the maximum limited partnership area, where there are new companies being brought public, and existing companies issuing new shares to help finance the mid-stream energy industry in this country, which I'm sure that many of you have read about. And then the third area is in the real estate securities segment, where we are at a very good time in the real estate cycle. As Marty mentioned earlier, our companies have tremendous access to capital, so the existing companies are using that access to expand their businesses on terms that are very accretive. But we are also seeing some new companies being formed in Asia occasionally, and in the US, and also some emerging markets like Mexico. So as long as the conditions that we are in today continue, we are going to continue to see more capital formation and company creation in the real estate area.

Great. Excellent detail. Thanks for hitting both sides of the question. I appreciate it. That's all I had today.

[John Dunn, Ciatti and Cole].

Thanks for taking my question. Under the 2013 investment spend, which areas do you think are likely to see the most spend?

Right I did not quite catch the question.

Sure. On the 2013 investment spend, which areas do you think need the most?

There will be a great deal in distribution. I think our popularity has probably outgrown our distribution force, and we need to service those distribution channels. We need to penetrate them a little better than we have. We think we can do that, whether it is in the retirement market in the US, or in Asia, where we are seeing a lot of interest in all of our strategies. So we have -- I would say distribution is where most of the investment spending will be.

Right. Okay. And then, on the closed-end fund side, do you have a sense of how many could be launched in 2013? In other words, if you get to the end of the year, what would you consider to be a successful year on that front?

Is very hard to say. I don't think we would want to put a number out. But as I mentioned, we are at work looking at strategies that would accommodate the markets. There is a lot of steps to coming public in one of these. It has to be a good strategy, you need an underwriter, you need the calendar to open up. So I don't think we would be that comfortable giving you any number.

Okay, great. Thank you. I appreciate it.

There are no further questions at this time.

Well, thank you very much for joining us, and we look forward to speaking with you next quarter.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for attending the presentation, and ask that you please disconnect your line.