Cohen & Steers Inc (CNS) 2013 Q3 法說會逐字稿

Welcome to the Cohen & Steers third-quarter 2013 financial results conference call. During the presentation, all participants will be in a listen-only mode. Afterward, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded today Thursday October 17, 2013. I'd now like to turn the conference over to Mr. Sal Rappa, Senior Vice President and Associate General Counsel. Please go ahead, sir.

Thank you and welcome to the Cohen & Steers third-quarter 2013 earnings conference call. Joining me are Co-Chairman 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 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 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 starters, expenses, and risks, please call 800-330-7348 for our prospectus.

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

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

Yesterday, we reported net income of $0.41 per share compared with $0.23 in the prior year and $0.34 sequentially. The third quarter of 2012 included after-tax expenses of approximately $0.21 per share, primarily due to costs associated with the offering of Cohen & Steers Limited Duration Preferred and Income Fund. After adjusting for these items, earnings per share for the third quarter of 2012 would have been $0.44.

Revenue for the quarter was $74 million, compared with $71.3 million in the prior year and $77.8 million sequentially. The increase in revenue from the prior year was attributable to higher average assets under management resulting from market appreciation, net inflows into open-end funds, and the launch of Cohen & Steers MLP Income and Energy Opportunity Fund; partially offset by net outflows from institutional accounts.

Average assets under management for the quarter were $47 billion, compared with $45.2 billion in the prior year and $50.2 billion sequentially. Our effective fee rate was 57.2 basis points, up from 56.3 basis points last quarter. The increase was primarily due to the continued shift in the mix of our assets under our management.

Operating income for the quarter was $27.7 million, compared with $12.2 million in the prior year and $28.6 million sequentially. Excluding the preferred closed-end fund offering costs, operating income for the third quarter of 2012 was $27.9 million. Our operating margin increased to 37.4% from 36.7% last quarter. The 74 basis point increase was the result of lower distribution and service fee expense and G&A, partially offset by an increase in the compensation-to-revenue ratio. Pre-tax income, net of non-controlling interest, was $29.5 million for the quarter, compared with $15.2 million in the prior year and $25.2 million sequentially.

Non-controlling interest represents third party interests in the funds we have consolidated. Excluding the preferred closed-end fund offering costs, pre-tax income for the third quarter of 2012 was $30.9 million. Assets under management totaled $46.3 billion at September 30, a decrease of $1.5 billion or 3% from June 30. The decrease in assets under management was attributable to net outflows of $1.4 billion and market depreciation of $137 million. At September 30, our US real estate strategy comprised 50% of the total assets we managed, followed by global and international real estate at 21%, preferred securities at 10%, global infrastructure at 10%, and large cap value at 8%.

Assets under management in institutional accounts totaled $23.3 billion at September 30, a decrease of $1.2 billion or 5% from the second quarter. The decrease was attributable to net outflows of $1.3 billion in global REIT, large cap value, and US REIT strategies, partially offset by market appreciation of $57 million. If you annualize third-quarter flows, institutional accounts had a 21% decay rate.

Current institutional awarded but unfunded mandates for commodity, global REIT, and global infrastructure strategies total $650 million, $500 million of which are expected to fund during the fourth quarter. Marty Cohen will provide some color on these mandates in a moment.

Our open-end funds had assets under management of $14.3 billion at September 30, a decrease of $180 million or 1% from the second quarter. The decrease was due to market depreciation of $134 million, and net outflows of $46 million. This is the first time since the first quarter of 2009 that we had net outflows in open-end funds. If you annualize third-quarter flows, open-end funds had a 1% organic decay rate.

Assets under management in our closed-end funds totaled $8.8 billion at September 30, essentially flat with last quarter. Assets under advisement decreased $1.1 billion or 14% from the second quarter, primarily from a decline in model-based strategies, the majority of which related to our business in Japan.

Moving to expenses, on a sequential basis, the expenses decreased 6%, primarily due to lower employee compensation and benefits, distribution in service fees, and G&A. Compensation-to-revenue ratio increased to 32.5%, up 50 basis points from the guidance we provided on our last call. This increase reflects the rounding out of our capabilities in our core product offerings, which led to the hiring of certain key individuals that Marty will discuss shortly.

After adjusting for the payments made in the second quarter related to the underwriters' over-allotment option for the MLP Closed-End Fund, the decrease in distribution in service fee expense was consistent with the decrease in the average assets of our open-end mutual funds.

Although the sequential decline in G&A was consistent with our expectations, the G&A-to-revenue ratio was a bit higher than the guidance we provided on our last call, as actual revenue was lower than forecasted. On a sequential basis, non-operating income, net of non-controlling interest, increased $5.2 million, primarily due to market appreciation on our seed investments.

Turning to the balance sheet, our firm liquidity totaled $195 million, compared with $181 million last quarter; and our stockholders' equity was $251 million compared with $234 million at June 30. We remain debt free.

A few brief items to consider for the fourth quarter. Our tax rate for the third quarter was 38%, consistent with the guidance we provided on the last call. We expect our effective tax rate for the fourth quarter to remain at 38%. With respect to compensation, we expect to maintain a 32.5% compensation-to-revenue ratio for the fourth quarter. And finally, we expect G&A for the fourth quarter to be consistent with the amount we recorded this quarter.

Now I'd like to turn it over to Marty Cohen.

Thank you, Matt, and thank you all for listening this morning.

As you can tell from Matt's remarks, there's a lot of numbers there; it appeared to be an uneventful quarter. On a statistical basis, we've ended up pretty much as we started the quarter. But when you dig a little deeper, which I'd like to do for you, there's a number of interesting trends that are emerging.

Our real estate strategies had diverse absolute performance; it's not a homogeneous group. US real estate experienced negative returns of about 2%, while international was nicely positive, up about 8%. Our non-real estate equity strategies were positive, in line with the stock market in general. Infrastructure, up 7%; large cap value up about 4%; and this was offset by preferreds, which were negative, falling in sympathy with the turning point in the bond market in the middle of the year.

From a flow standpoint, our open-end real estate funds have enjoyed steady positive flows in eight out of the nine months so far this year. This is important to us because it suggests that despite popular sentiment that is counting out REITs in light of rising interest rates, this is just not the case with respect to investor behavior. Real estate and REITs remain a cornerstone of many investment portfolios.

Preferreds, on the other hand, which were our biggest driver of open-end funds early this year, turned negative beginning in June when interest rates began to rise, and this negative flow trend has continued into October. The net of this is that the quarterly decline in our assets under management was the direct result of outflows from institutional accounts, a combination of real estate and large cap value. Encouragingly, we believe that our strong relative performance, particularly real estate, has begun to stem the tide of institutional outflows and we are once again gaining new institutional accounts.

Both our near- and long-term performance track records remain firmly and positively intact and, as you can imagine, the feedback from both clients and consultants has been very positive. Already funded so far in October has been an additional $170 million institutional accounts for global real estate and global listed infrastructure. We still are very positive, as is the institutional world, on the listed infrastructure strategy; and in addition to what has already funded, we have some $200 million in yet to be funded commitments for this strategy and we're in the mix on a number of new searches.

Importantly, we've now completed the buildout of our real asset complex. As a reminder, our real asset strategy encompasses real estate, commodities, infrastructure, and natural resources, either as standalone portfolios or in combination. We have brought our natural resource equities efforts in-house and we now no longer use any subadvisors.

Our commodity team is soundly in place and has been awarded a $230 million mandate that has just funded this week. Our team is also on the short list for several other searches. As Bob alluded to in last quarter's call, Vince Childers, a highly accomplished real asset strategist and portfolio manager, has now joined us from AllianceBernstein and is leading our real assets efforts.

On the distribution side, we continue to invest in talent. We have added Ken Itai, an experienced client service professional, to head our Tokyo office. Ken previously worked for Wellington Management, and is thoroughly familiar with the Japanese institutional and retail marketplace. As you're aware, Japan is an important market for us and one we would like to build upon. We have developed a very good reputation there, and Bob and I will be traveling to Tokyo next month to celebrate the 10th anniversary of our relationship with Daiwa Asset Management.

Further on the distribution side, we are actively recruiting an individual to lead our defined contribution efforts. We believe that our real asset concentration serves to differentiate us from much of our competition in this marketplace. Our sense is that real assets is already in demand in the DC markets due to its diversification benefits, and there are very few managers with the credentials that we possess.

I should mention that on the expense side we continue to balance being cost conscious with investing in our business. This investment primarily consists of talent and efficiency. We have discontinued certain unprofitable initiatives and have concentrated our resources on our core strategies. With those core strategies in place, we look forward to a new phase of growth in our business.

And with that, I'd like to stop and ask if there are any questions.

(Operator Instructions)

Our first question comes from the line of Mac Sykes from Gabelli Co.

Good morning, gentlemen. Thank you for taking my questions. Marty, I think you briefly touched on this, but I wondered if you could give us some more color. Just looking at the outflows this quarter, on whether you could differentiate them from relative performance or getting out of the asset class about fears of REITs, is there any way to differentiate that?

Very hard to differentiate why someone redeems or not but I can tell you that on the real estate side, we had positive flows in the third quarter.

Institutionally, we had $820 million of global real estate outflows from three clients and it was performance-related. And as Marty mentioned, while you never know for sure, we're highly confident that real estate outflows institutionally are behind us and as Marty mentioned, we're getting net new mandates.

And so as I mentioned in the second quarter call, our performance had turned around and the latest 12 months and longer the numbers look extremely good and we've got great feedback from our clients. So I think the $820 million of institutional outflows that were real estate related is a significantly lagging indicator and based on our analysis of our existing client base, we really don't see any meaningful risk going forward.

I was referring -- when I said positive flows in the quarter, I was referring to our open-end funds which I think are a much broader measure of the asset class and its acceptance in this --

Congrats on your --

REIT flows were positive in the quarter, as Marty mentioned, eight out of nine months. And for the quarter, we're still seeing positive flows.

Great. And congrats on your hire in Japan. I was just curious what sorts of opportunities do you see there outside of Daiwa, and how might the opening of the office there help you there?

Well Ken, as Marty mentioned, came from Wellington and, interestingly, he brings with him a wide range of client relationships. Daiwa was not one of his clients while at Wellington. So one of Ken's strengths is that he's a business development person who was very successful with Wellington and brings client relationships beyond Daiwa. And we're committed to Daiwa for our real estate strategies but we have, as Marty mentioned, a broad range of real asset strategies that we're talking to other distributors about.

I think it's also worth pointing out that one of the other important catalysts behind bringing on a senior person like Ken is that early next year in Japan they're launching their equivalent of the 401(k), or defined contribution business. So it's really a very significant new market opportunity, especially for banks who have many of these retail client relationships already. So Daiwa and others are gearing up significantly to compete for what will be the beginning of an important new asset gathering opportunity for the entire industry over there.

And it's one that is not a fast money operation. It's where there's investors commit to certain assets and there's not a lot of penalties for outflows. So it's an interesting opportunity. How big it is, we don't know, but we're going to be there and on the reputation, it should be good for us.

Okay. My last question is you continue to build cash on your balance sheet and have paid out special dividends last couple years. Any thought on capital deployment between now and the end of the year?

Well, it's something we bring up with our Board annually and we'll let the Board decide that when they next meet.

Great. Thank you very much.

(Operator Instructions)

And our next question comes from the line of John Dunn from Sidoti.

Good morning, guys. My first question was on, it sounds like the global real estate mandates look positive. What about in the US real estate segment? What's the outlook for mandate, institutional mandates there?

I think it's solid. It's hard to project, but our US performance numbers are extremely strong on a one year or three year numbers, are now also very competitive, 5, 10, 20 are among the best. So I think that US REITs are actually looking attractive again. I think there was some concern after the second quarter that REITs had gotten ahead of themselves and so interest waned a bit. And I think the under performance in the third quarter is causing, particularly people who are asset allocation oriented, to re-examine their weightings there. I would say the demand is strong but it's not unusually strong and we haven't really seen a lot of weakness either.

Got you. And would it be fair to characterize --

I would say, where we are seeing acceleration in demand on the institutional side is both listed infrastructure and commodities. It's an interesting phenomenon. The institutional world is very, very interested in real assets in -- whether it's real estate commodities, infrastructure, natural resources, as in looking into next year.

And so we're winning mandates, as Marty mentioned, commodities, we've got a very large mandate there, we're winning multiple mandates in infrastructure. So we're actually seeing an acceleration in institutional demand for the range of our products, whereas retail it's chugging -- REITs are chugging along but we have lost momentum in the preferred space.

Do you have a longer term target of what percentage of AUM you'd like the realized asset strategy to be?

We can't predict the market and the market's going to tell us what that's going to be. Clearly, and if you look at all the real asset funds that are out there, it's not been the best place to be for the last year or two.

It's our view in looking out five years by virtue of a number of factors, continued economic growth, demographic shifts, the emerging markets and the diversification benefits of these combined asset classes, that it will be in strong demand. As Bob said, the institutional market has picked up on this and we think that the DC markets has and will continue to because there really are some important benefits in a diversified portfolio.

Marty makes an excellent point. A number of these mandates that we've gotten institutionally are sleeves of somebody else's real asset strategy that are being offered to target date plans, DC funds on a standalone basis, and so on. From a strategic standpoint, we see that most large endowments, for example, have 10% to 30% allocated to real assets.

Many of the leading distributors, Merrill, Morgan Stanleys, and others are advocating significant weightings in client portfolios in real assets which are currently close to zero today. And so we think that's where investors' interest is going to be headed. And we're just confident that at some point along the way there will be very, very significant retail demand for all of these strategies.

Great. Just last question. Would it be fair to characterize when the REIT sector gets less correlated in terms of stock price movements, do you guys expect to first of all outperform the rest of the REIT investors and pick up share? And maybe if what happened last time we got close to the rate hike, how you guys did relative to everybody else?

Traditionally, or historically, REITs have not been that interest rate sensitive. They are talked about as being interest rate sensitive and believed to be, but when you examine the track record other than in brief periods, like we had perhaps over the summer, REITs are not that interest rate sensitive because if rates are rising because of strong economic activity and inflation, then real estate's what you want to own. And when you look at periods like that, then that has in fact been the case. So we don't expect that to change, although near term anything can happen.

We are, and I think it's important to emphasize, we are the go-to guys on this. Every manager may have a slump year or so, but basically there's no long-term track record that is either longer or superior to ours. So we expect to always be getting our share of (technical difficulty) flows and always be in the top ranks with respect to performance.

And this year we've gained market share, both when REITs were moving higher with a broader market in the first half of the year, as well as in the third quarter. So, as Marty said, when our performance is as strong as we expect it to be, we expect to gain market share and that's been the case this year.

Great. Thank you very much.

And our next question comes from the line of Marc Irizarry from Goldman Sachs.

Hi, guys, this is Stephen actually for Mark. Just a few questions. First, I was hoping you could speak to the dynamics in the assets under advisement, whether that was performance driven, the decline quarter-over-quarter, if that's performance driven, flow driven, or any categorization changes we should know about?

The performance aspect of it is not dissimilar to what we experienced in our assets under management. The model based strategies, as we had pointed out, there's a component of that that's from our Japanese business relationships and there's a piece of that that's outflows.

But the rest of it is you could apply what the market depreciation was to some of the other classes and that would be consistent with the ETF piece and the UIT piece. The ETF piece is very low fee for us, model based is a little bit higher. And the UITs had a small variation. So most of it was model based and ETF.

And in the model based, primarily global, not US.

Right.

Okay. Great. That's helpful. Second was just wondering what you're seeing in terms of the opportunities in the next 12 months in closed-end funds?

Looks like the window's somewhat closed now. There have not been any significant offerings. We had one teed up for September in the preferred area. But preferred funds are now selling at discounts and there's not that strong of demand.

We always have a couple of funds on file so that when the window opens we're ready to move. We have a very strong relationships as you know with all of the underwriters and we're one of the largest purveyors of closed-end funds. So when the window opens, we're confident that we'll have something to take advantage of, first the investment opportunity and next the distribution opportunity.

Great. And just one more question. I just was wondering, we talked some about Japan today from a client perspective and I just was wondering as you guys are building out abroad, how much hiring we should expect to see and just overall what the margin dynamics are as you scale some of your international businesses?

You know, we're looking at bringing in the strongest talent possible wherever we have a need. We're not really looking at it from a budget standpoint. And so I think our senior ranks are relatively well-staffed right now. So don't expect maybe major hires. We continue to develop the middle and the up-and-coming class of employees as well. I wouldn't expect necessarily a big comp increase based on our current plans.

From marketing and distribution and product, we are where we want to be and we're really looking at 2014 as a year to execute. All the pieces are in place. I think the investment teams, some sales and marketing people, Marty mentioned a serious new addition in the DC IO side. But all of the key people are in place and so it's really just execution now, not building.

Great, that's --

And to repeat what Matt said, our increase in our comp ratio, this modest increase, is not due to an explosion in staff but basically when we established our comp ratio earlier in the year, it was based on assets at that time and expected flows and without a market depreciation. Since we've had some outflows and some depreciation, that has challenged the revenue side a little bit which has caused the comp ratio to increase very, very slightly.

That's all very helpful. And maybe just on that last piece, so, are you hinting that maybe $24 million or so on a quarterly basis is maybe a better way to think about it than a ratio, or no?

No, I wouldn't think about it that way. We always try to give some forward-looking guidance on a ratio based on our modeling here and our understanding of where we think the business is going. So I wouldn't say using an absolute number is necessarily a good proxy. I'd just use the 32.5% for the fourth quarter and we'll give guidance for 2014 on the next call.

Great. Thank you very much.

And our next question comes from the line of Adam Beatty from Bank of America.

Thank you and good morning. Just a follow-up question on Japan. It looks like the subadvisory flows, while they're still negative, continue to improve. So I was hoping you could just maybe even in the face of maybe some folks turning away from the asset class in some of your other channels. So I was hoping maybe you could give some color on that, whether you feel as though the fast money is kind of left at this point or are there performance dynamics behind that or any other thoughts? Thanks.

Well, you know, we mentioned in the last call that this summer we worked with Daiwa on some road shows for some of our existing funds and they were very well-received and I think that's the main reason why outflows have continued to improve. And, in fact, we're -- I don't have the numbers in front of me but we're very close to kind of breakeven there with respect to sales in and redemptions out. The main contributing factor to flows out you now are simply they make very large distributions on a monthly basis and so it varies by month, but as a general statement we're basically at treading water here.

And to your comment, yes, we're not seeing velocity in or out right now, which was our goal. As you know, we had high velocity in after the dividend cut. We had some high velocity out. Now we're stabilizing. As I mentioned earlier, we met with Daiwa here in New York this week, Marty and I will be there next month. And we're having ongoing, very high level discussions on how to collaborate on both marketing the existing funds, but take advantage of this what could be long term as big an opportunity as the DC marketplace is here. There's not going to be any overnight success, but the bell rings on January 1 and it's a very big opportunity. And it's something that Daiwa absolutely has two of our funds in their product lineup and we're going to work very hard to make sure that we're front and center once the bell goes off. So we're in I think a very good position right now over there.

Thank you. That's great detail. Really appreciate it. Just turning to earlier I think Matt mentioned the blended fee rate and it sounds like there's been a bit of a positive mix shift. My mind of course first goes to subadvisory and maybe some of the prior outflows helping the fee mix a little bit. Are there any other dynamics there in terms of either asset class or products that have distinctly higher or lower fees that might shift that blended rate?

No, I think it's just when you look at the composition of our asset mix, open-end funds and closed-end funds have been getting higher concentrations or percentage of our overall, and that's just had the effect of increasing the effective fee rate. As you point out, you lose subadvisory assets, they're our lowest fee rate and advisory are next. But open-end and closed-end are our highest fee rates.

Great. Thanks for that. Just one final one. Thanks for taking all my questions. In terms of G&A, and you did give some guidance for 4Q so that's helpful, you mentioned in the release some IT consolidation and streamlining. Just wondering if there's any other initiatives ongoing with that where you might be in the mood right now to spend now, save later or we might look for some additional ratcheting down on that account?

I think we're always looking to automate as much as possible and add a lot of efficiencies into our processes and that was evidenced in the quarter. Going forward, there's nothing of note that would have an influence on the G&A line, relates to IT spend.

Great. Thanks again for taking all my questions. Appreciate it.

And there's no further questions on the phone lines. I'd turn the call back to you, Mr. Rappa.

Well, thank you all for joining us today and we look forward to talking to you next quarter. Thank you.

And ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines. Have a nice day, everybody.