Cohen & Steers Inc (CNS) 2013 Q2 法說會逐字稿

Welcome to the Cohen & Steers second-quarter 2013 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 Thursday July 18, 2013.

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

Thank you and welcome to the Cohen & Steers' second-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 than those indicated in these statements. We believe that some of these factors are described in the risk factors section of our 2012 Form 10-K, which is available on our website at www.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 a detailed disclosures of 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 solicitation of any offer to buy any securities. 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, and good morning, everyone, and thanks for joining us today. Yesterday we reported net income of $0.34 per share, compared with $0.36 in the prior year and $0.34 sequentially. the first quarter 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 for the first quarter would have been $0.44.

Revenue for the quarter was a record $77.8 million, compared with $67.4 million in the prior-year and $72.5 million sequentially. The increase in revenue from the prior year was attributable to higher average assets resulting from market appreciation, the launch of two closed-end funds and net inflows into open-end funds partially offset by net outflows by institutionalized, sub-advised relationships.

Average assets for the quarter were a record $50.2 billion, compared with $43.6 billion in the prior-year, and $47.4 billion last quarter. Our effective fee rate for the quarter was 56.3 basis points, up from 55.9 basis points last quarter. the increase was primarily due to a shift in the mix of our assets under management.

Operating income for the quarter was $28.6 million compared with $26.1 million in the prior-year and $20.7 million sequentially. Excluding the closed-end fund operating costs, operating income for the first quarter was $28.5 million.

Our operating margin decreased to 36.7% from 39.4% last quarter, after adjusting for the first-quarter offering costs. The 270 basis point decline was primarily due to higher distribution expense and G&A-to-revenue ratios.

Pre-tax income, net of non-controlling interest, was $25.2 million for the quarter compared with $25.1 million in the prior-year, and $23.3 million sequentially. Non-controlling interest represents third-party interest in the funds we have consolidated. Excluding the offering costs, pre-tax income for the first quarter was $31.1 million. Assets under management totaled $47.8 billion at June 30, a decrease of $1.5 billion or 3%, from March 31. The decrease in assets under management was attributable to market appreciation of $1 billion and net outflows of $449 million.

At June 30, our real estate strategy comprised 51% of the total assets we managed, followed by global and international real estate at 21%, preferred securities at 11%, global infrastructure at 9% and large cap value at 8%. Assets under management in institutional accounts totaled $24.5 billion at June 30, a decrease of $1.5 billion or 6%, from the first quarter. The decrease was due to net outflows of $1.1 billion, a majority of which were in global and international real estate and large cap value [subadvice] strategies, and market depreciation of $454 million. If you annualize second-quarter flows, institutional accounts had a 17% decay rate. We are encouraged by the increased interest in our core strategies, as evidenced by our institutional pipeline, which is the largest it has been in some time. Bob Steers will provide some color on this in a moment.

Open-end funds had assets under management of $14.4 billion at June 30, essentially flat with March 31, as market depreciation of $364 million, was offset by net inflows of $359 million. This marks the 17th consecutive quarter of net inflows into our open-ended mutual funds. If you annualize second-quarter flows, open-end funds had a 10% organic growth rate.

Assets under management of closed-end funds totalled $8.8 billion at June 30, an increase of $50 million from the first quarter. The increase was due to inflows of $281 million into Cohen & Steers' MLP income and energy opportunity fund, from the exercise of the underwriters' over-allotment option and the deployment of the funds' leverage facility. This was partially offset by market depreciation of $231 million. Assets under advisement decreased $634 million, or 8% from the first quarter, primarily from outflows and model-based strategies attributable to our business in Japan.

Moving to expenses. On a sequential basis, expenses as reported decreased 5%, but excluding the closed-end fund operating cost from the first quarter, expenses increased 12%. The increase was primarily due to higher employee compensation and benefits, distribution and service fees, and G&A. Compensation to revenue ratio for the quarter was 32%, consistent with the guidance provided on our last call. After adjusting for the closed-end fund payments made in the first quarter, the increase in distribution and service fee expenses was attributable to higher average assets in our open-ended mutual funds, and payments made in the second quarter related to the exercise of the underwriters over-allotment option for our closed-end fund.

The increase in G&A, which is greater than the guidance we provided on our last call, was primarily due to higher reimbursement costs on two of our open-ended mutual funds. These funds have expense caps which require the advisor to reimburse them for costs incurred in excess of the cap. On a sequential basis, nonoperating income decreased $6 million net of non-controlling interest. The decrease was primarily due to market depreciation in our seed investments. As a reminder, the loss from training caption includes the results of seed investments that we are required to consolidate, including interest held by third parties. After adjusting for non-controlling interest, our nonoperating loss was $3.4 million.

Turning to the balance sheet, our firm liquidity totaled $181 million, compared with $166 million last quarter, and our stockholders' equity was $234 million, compared with $223 million at March 31, and we remain debt-free.

Let me briefly discuss a few items to consider for the second half of 2013. Our projective tax rate for 2013 increased to approximately 38% from 37%. Previously we projected nonoperating gains for 2013 which, due to accumulated capital loss carry forwards, would have resulted in no associated tax expense. Based on second-quarter results, in the redemption of some of our seed capital, we are now projecting a lower amount of nonoperating gains for the year. The cumulative effect of this change in estimate was recorded in the second quarter, resulting in an effective tax rate of 39.2%. We expect that our effective tax rate will approximate 38% for the remainder of the year.

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 half of the year, with G&A in the third quarter being slightly higher than the fourth quarter.

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

Great. Good morning. As you already know, the latter half of the second quarter was marked by a dramatic reversal and increased volatility, in both of the debt and equity markets. Chairman Bernanke's taper remarks triggered a decline in bond prices and a record-setting stampede out of almost all fixed income strategies further exacerbating investor losses. Many believe that June will prove to be the turning point for the multi-decade bull market in fixed income, but only time will tell.

Coincidentally, investors in the equity markets also struggled to discern which industries and strategies will be the winners going forward. Income-oriented equity, such as REITs got hit particularly hard. Because the Fed has indicated that it plans to pull back only if the current economic expansion is strong, self-sustaining and characterized by rising employment. We believe that economically sensitive asset classes like REITs are ultimately winners in this cycle and certainly should not trade in sympathy with bond markets.

In any event, the second quarter was not only due to transition for the market, but for Cohen & Steers as well. Let me briefly recap some important changes that occurred in the quarter. First and most important is investment performance, and we are pleased to report that for the 12 months ended June, five out of seven equity strategies are meaningfully ahead of their benchmarks and our flagship US REIT strategy is at or near the top of the charts, versus our competitors. As you may recall, it was exactly one year ago, following a period of under-performance in our US and global REIT strategies, that we made significant changes to the investment leadership of that group. Relative performance has been improving since then, and as I commented earlier, a fundamental outlook for real estate and REITs is very favorable.

Turning to our non-equity REIT strategies, listed infrastructures is 123 basis points ahead of its benchmark, year to date, and more than 340 basis points over on both a three- and five-year basis. This is particularly meaningful today because institutional demand for this strategy has ramped up substantially this year.

As we have come to expect, our preferred securities team has continued to perform at the elite level. During the quarter, our open-end fund celebrated its third anniversary and, in addition to surpassing its benchmark by over 70 basis points in the quarter, MorningStar assigned it a five-star rating. Not only that, but the fund ranks in the top 1% of virtually all fixed income funds over this three year period and has obviously also the number one ranked preferred securities fund. Lastly, our large cap value team, while generating substantial absolute returns, struggled to bid on a relative basis trailing a benchmark by 8 basis points. The bottom line is that our core real estate infrastructure and preferred teams are all generating strong absolute and relative returns for our investors, which bodes well for future asset flows.

Turning to asset flows, our institutional flows in the quarter reflected noteworthy shifts in both investment performance and investor preferences. Although I indicated earlier our global REIT count has outperformed our benchmarks and most of our peers over the last 12 months, we did lose three separate accounts totaling about $550 million. While disappointing, we view these losses as a lagging indicator and a legacy of the under-performance which ended a year ago. During the quarter we also lost two large cap value separate accounts totaling $145 million, due to investment performance. Our sub advisory and separate account relationships, excluding Japan, experienced only slight outflows of about $75 million and $16 million respectively in the quarter, mainly due to rebalancing.

Turning to Japan, the flow trends there continue to show solid improvement. Outflows have been trending lower all year and May was actually flat. Based on our current marketing support programs in Japan, we anticipate that, subject to market conditions, we will experience net positive flows for the balance of the year.

Finally, as of today, we have five awarded, but unfunded mandates totalling approximately $460 million, and as Matt mentioned, we are seeing a large and growing institutional pipeline of potential mandates. Interestingly, a majority of our pipeline was focused in our listed infrastructure and commodity future strategies, which is very encouraging. So to recap our outlook for the institutional segment, we think that the client outflows from REIT portfolios are largely behind us; that outflows from Japan could turn into positive flows in the second half of this year; and investor interest in our listed infrastructure and commodity [future] strategies is strong and growing.

Retail flows in the quarter were solid across the board, even factoring in the events in June. Net inflows were $359 million, led by a preferred fund, but we also experienced solid flows into most of our real estate funds. In addition, we filed a global preferred securities closed-end fund and, subject to market conditions, Merrill Lynch and Morgan Stanley have agreed to co-lead this transaction, which is tentatively scheduled for September. In addition, investor interest in MLPs remain high and we have filed an open-end MLP fund that should be available to investors later this year.

Lastly, just a few parting thoughts. At the Company level, we are putting the finishing touches on an exciting and logical transition. Whereas we've been known as a REIT specialist for decades, we are near the end of our transformation into a fully-integrated, and hopefully industry-leading, real asset manager. As I eluded to in my comments on flows, during the quarter we lifted out one of the industry's top performing commodity futures investment teams. In consistent with our view that institutions are in the process of increasing allocations to liquid real asset strategies, our team is already a finalist for multiple institutional mandates and the level of ongoing interest is very high.

By the end of this current quarter, we will have in place industry-leading teams investing across the spectrum of real asset strategies and led by a proven investment and [thought] leader, who will be joining us next month. Looking ahead, we have no doubt that real assets will be a rapidly expanding asset class with very few managers capable of delivering either thought leadership or compelling investment performance. Our goal is to be the industry leader in this space and each of the underlying strategies.

I am going to stop there and ask the operator to open the floor to questions.

[Operator Instructions]

Adam Beatty with Bank of America, Merrill Lynch

Just a question on the strong, institutional pipeline. It sounds like investors are moving more towards real assets. Do you think that that is a quest for yield or more an attempt to diversify into more uncorrelated assets. And also, where does your core real estate strategies fit into that and have you seen similar interest in those?

Adam, I would say that the interest institutionally is mainly for uncorrelated assets, but also looking for high returns. I think that if you look at the leading endowment funds, for example - Ivy League funds and others - they have virtually zero allocated to fixed income, and I mean that literally. And they have 20% to 30% allocated to real assets.

And that is not simply for diversification. I think their expectation is that this economic expansion will continue and that based on a lot of factors, both cyclical, but also monetary and physical policies. It could be accompanied by rising commodity prices and so on.

So, I think diversification, relatively high returns, is why they're investing here, not for yield. We are seeing this increase in demand mainly in the institutional channel, we are not really seeing that yet in the retail channels where we continue to see good interest in income-oriented strategies like preferreds and like REITs.

Thank you, that is very helpful. Just a quick question, trying to parse out the fee rate a little. Do you think the increase there is mainly due to some of the reduction in some advised or other low-fee assets under management or advisement. Or does it have to do with maybe higher fees on some of your successful new products?

I think, Adam, it's the shift in our assets under management as we have been experiencing outflows and institutional sub advice with a lower fee. And we have launched two closed-end funds and we're having great success in our retail channel. So that is really accounting for the overall mix. Nothing really more than that.

Got it, just one more, thanks for taking my questions. In terms of the G&A, and higher reimbursement cost, could you outline a little bit more detail around the mechanics of that, how that occurs and when and if we might expect similar in the future?

On a couple of our funds where we went to market with a total expense ratio that was at or close to our advisory fee. So in essence, any expenses that the fund absorbs, both fixed and variable, would be absorbed by the advisor in the event that the expense ratio is capped at our management fee.

So you have seen the tremendous growth that we have had in our preferred fund and with that growth are some incremental variable expenses and as those expenses are incurred, the advisor absorbs them. I think that is the reason for the tick up in the G&A, I do not necessarily - we do not believe there should be any additional tick up beyond the 15% that we are projecting of G&A for the second half of the year. That would include projected expenses from the fund.

So, like with every forecast, you have a forecast and then you have reality. We think we are in a good position now, and it's going to be based upon close and transaction levels.

Great. So to the extent that it is an ongoing situation that you have incorporated into the guidance?

Yes.

Super. Thank you very much, that is all I had this morning. I appreciate it.

Marc Irizarry with Goldman Sachs. Please go ahead.

Hey guys, this is actually Stephen Jones here for Marc. I just have one questions.

I know last year we saw sort of a change in the comp ratio accounting for different accrual towards the end of the year and you cited excess performances contributing to that. You mentioned on the call now that you are pleased with the improvement in excess performance. Should we expect any kind of tick up in comps or the opposite of last year, the end of 2013?

No, based on our internal projections, we think 32% is the right ratio to where we are today. I mean, obviously, we have to see how the second half unfolds relative to those projections so it is not - it's a good proxy, but we will react to the markets and do the right thing at year end like we always do. But I think 32% for now, we feel comfortable with that.

Okay, great. Thanks.

There are no other questions at the moment. I will now turn the call back to you.

Great. Well thank you all for listening in this morning and enjoy the rest of your summer. We will speak to you in the fall. Thank you.