Cohen & Steers Inc (CNS) 2014 Q4 法說會逐字稿

Welcome to the Cohen & Steers fourth quarter 2014 financial results conference call.

(Operator Instructions)

This conference is being recorded Thursday, January 22, 2015. I would now like to turn the conference over to Mr. Adam Johnson, Senior Vice President and Associate General Counsel. Please go ahead.

Thank you and welcome to the Cohen & Steers fourth quarter and full year 2014 earnings conference call. Joining me are Chief Executive Officer, Bob Steers; Executive Chairman, Marty Cohen; 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 2013 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 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 may also contain information about funds that have filed registration statements with the SEC that 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 1-800-330-7348 for a prospectus. With that I will turn the call over to Matt.

Thank you, Adam, and thanks everyone for joining us this morning. Yesterday we reported net income of $0.34 per share compared with $0.43 in the prior year and $0.40 sequentially. Operating income per share was $0.39 for the quarter compared with $0.40 in the prior year and $0.45 sequentially. Revenue for the quarter was a record $81.8 million compared with $73.4 million in the prior year and $80.8 million sequentially.

The increase in revenue from the prior year's quarter was attributable to higher average assets under management resulting from market appreciation partially offset by net outflows from institutional sub advised account. Average assets for the quarter were a record $52.4 billion compared with $47 billion in the prior year's quarter and $51.6 billion sequentially. Our effective fee rate for the quarter was 57.6 basis points, in line with last quarter.

Operating income was $32.4 million compared with $29.4 million in the prior year and $32.3 million sequentially. Our operating margin decreased to 39.5% from 40% last quarter. The decrease was primarily due to higher G&A costs partially offset by lower employee compensation and benefits. Pretax income net of non-controlling interest was $28.3 million for the quarter compared with $31.3 million in the prior year's quarter and $28.9 million sequentially.

Non controlling interests represents third-party interests in the funds we have consolidated. For the year, we reported net income of $1.65 per share compared with $1.51 per share last year. The 2013 results included tax expenses of approximately $0.10 per share attributable to closed-end fund offering costs. That's after-tax expenses. After adjusting for these items earnings per share were $1.61 for 2013.

Assets under management at quarter end were a record $53.1 billion, an increase of $3.4 billion, or 7% from September 30. The increase in assets under management was attributable to market appreciation of $4.2 billion, partially offset by net outflows of $794 million. For the year, assets under management increased $7.2 billion. The increase was due to market appreciation of $9.1 billion, partially offset by net outflows of $1.9 billion.

At December 31, our US real estate strategy comprised 53% of the total assets we managed followed by global and international real estate at 19%, preferred securities at 12%, and global listed infrastructure at 11%. Assets under management in institutional accounts totaled $26.2 billion at December 31, an increase of $2.3 billion or 9% from the third quarter. The increase was due to market appreciation of $2.5 billion, partially offset by net outflows of $268 million, the majority of which were from subadvised portfolios in Japan.

We recorded $750 million of net outflows primarily from US and global real estate subadvised portfolios with Daiwa. Those outflows were partially offset by $300 million of sub advised inflows into preferred and global listed infrastructure portfolios with our two new distribution partners in Japan. We also recorded $200 million of net inflows into commodity portfolios during the quarter.

For the year, assets under management increased $3.3 billion, or 14%. The increase was due to market appreciation of $5.2 billion, partially offset by net outflows of $2.1 billion.

Outflows included $1.6 billion from large cap value portfolios and $1.5 billion from US and global real estate portfolios, partially offset by inflows of $1 billion into global listed infrastructure, preferred and commodity portfolios. Institutional accounts had a 9% decay rate for 2014. Bob Steers will provide a little color on our institutional pipeline in a moment.

Our open-end funds had record quarter end assets under management of $17.1 billion at December 31, an increase of $1 billion or 6% from the third quarter. The increase was due to market appreciation of $1.5 billion, partially offset by net outflows of $526 million. During the quarter, we recorded $640 million of outflows from an intermediary who eliminated its US REIT allocation.

For the year, assets under management increased $3.1 billion or 22% due to market appreciation of $3 billion and net outflows of $196 million. During the year we recorded $1 billion of outflows from three inter intermediaries who either eliminated or reduced their weightings to US REITs. Our 2014 organic growth rates for open end funds was 1%.

Assets under management in our closed end funds totaled $9.8 billion at December 31, an increase of $167 million or 2% from the third quarter. For the year, assets under management increased $840 million, or 9%. The increases in the fourth quarter and for the full year were due to market appreciation.

Moving to expenses, on a sequential basis, expenses increased 2% primarily due to higher G&A, partially offset by lower employee compensation and benefits. The increase in G&A was primarily due to higher fund related costs as well as increases in both hosted and sponsored conferences including two real assets institutes in New York and one in Philadelphia.

The compensation to revenue ratio for the quarter was 31.9% below the 33% guidance given on our last call. The reduction was primarily due to lower production compensation. On a sequential basis, non-operating loss, net of non-controlling interest, increased $606,000 from a loss of $3.4 million last quarter to a loss of $4 million in the fourth quarter. Non-operating loss for the quarter was primarily due to higher unrealized losses from our seed investments, the majority of which were from commodity, MLP, and midstream energy strategies.

On our last call we projected an effective tax rate for the year of 36%. This projection was based upon estimated non-operating gains for 2014 which, due to accumulated capital loss carry-forwards, would have resulted in no associated tax expense. Based on fourth quarter results, we no longer had non-operating gains against which to apply our capital loss carry-forwards, and therefore our effective tax rate for 2014 was 38%. The cumulative effect of this change has been reflected in the fourth quarter, resulting in an effective tax rate of 44.6%.

Turning to the balance sheet, our firm liquidity totaled $185 million compared with $203 million last quarter, and stockholders' equity was $228 million compared with $262 million at September 30. The sequential declines in firm liquidity and stockholders' equity reflect a special dividend payment in December of approximately $45 million. Over the past five years, we have paid $6.50 per share in special dividends, and we remain debt free.

Let me briefly discuss a few items to consider for 2015. As previously discussed, the five-year restricted stock units we issued coming out of the financial crisis have been fully amortized, and as a result, we expect to have lower deferred compensation expense in 2015. We expect our compensation revenue -- compensation to revenue ratio to be approximately 31%. We expect G&A will include higher costs related to additional real assets institutes and expansion space at our corporate headquarters in New York.

As a result, we project G&A to increase between 6% to 8% from 2014. Based on our preliminary projections, we expect our effective tax rate will approximately -- approximate 36.5% for 2014. And finally, we expect our effective fee rate for 2015 will be between 57 and 58 basis points. Now I would like to hand it over to Bob Steers.

Thanks, Matt, and good morning, everyone. As most of you know, the fourth quarter was challenging for most investment managers. Oil prices plunged, spurring debate about the widespread but disparate effects on the future growth prospects for countries around the world. De-coupling is back, and this time it appears that the US is the pillar of strength among the global economies, with the outlook for Europe, China, and most oil exporters decidedly weak.

With this as the backdrop, expectations are that monetary policy around the globe will remain highly accommodative. These factors in combination have resulted in massive movements in volatility in the currency markets, and not surprising, the global equity markets, too, have seen a material uptick in volatility. Unfortunately in this environment a majority of active managers, including hedge funds, provided disappointing returns to investors with most substantially under performing the US equity market in the quarter and for the full year.

This macro backdrop has been positive for the majority of our portfolios but has generated short-term headwinds for several of our natural resource related strategies. Our investment performance in the latest quarter was mixed with four out of nine strategies beating their benchmarks. More importantly, for the second consecutive calendar year, eight of our nine investment strategies have finished convincingly ahead of their benchmarks and peers.

In fact, our top performing US real estate fund now ranks in the top quartile of its peers for the last one-, three-, and five-year periods. Our MLP midstream energy fund was the top rated fund in its category by Morningstar last year, and our large cap value fund ranked in the top decile of its Morningstar peer group. In addition to strong relative performance our real estate infrastructure, MLP, large cap value and preferred security strategies all delivered substantial absolute returns ranging from 13% to 31%.

Wealth management gross inflows were a solid $1.4 billion in the quarter. However, as Matt said, these strong results were offset by a wealth management platform which eliminated its $640 million real estate allocation. This was an asset allocation decision and not performance related. But as a result, net outflows for the quarter totaled $526 million.

I think it's worth noting that wealth management experience record full-year gross sales of almost $6 billion which reflects the increasing allocations to real asset and preferred security strategies, along strong investment performance across our platform.

Activity in the institutional advisory channel was somewhat subdued with net outflows in the quarter amounting to $99 million. The pipeline of newly awarded but unfunded mandates now totals $315 million and is mainly attributable to two new separate accounts, one for global listed infrastructure, the other global real estate from a large Asian public pension fund.

Our sub advisory channel continues to show good improvement. Net outflows improved to $169 million, which is the lowest quarterly outflow since the third quarter of 2011 and compares to $845 million of outflows in the prior quarter. Excluding our largest Japanese sub advisory client, Diawa, we actually generated $588 million of net inflows during the quarter.

The inflows were spread across four different investment strategies, commodities, preferred securities, global listed real estate, and global listed infrastructure. And almost half of these inflows were derived from our new distribution partners in Asia. These new distribution relationships, together with additional product and marketing initiatives from our existing partners will be the key to continued progress here.

Looking ahead, we begin 2015 with record quarter-end assets under management and lots of momentum. Gross sales into the wealth management channel are at record levels and growing. The number of sub advisory relationships is also expanding as are asset flows.

Real asset product extension program is largely complete, and we are planning no new major initiatives for this year. Underpinning our growth prospects is strong absolute and relative performance. With few exceptions both our short and long-term results are among the best in the industry. This is especially important now as the industry surveys indicate that global investors both institutional and retail plan on increasing their allocations to real assets in the coming year and income remains in short supply.

With most of our new product and marketing initiatives behind us, we are singularly focused this year on capitalizing on our excellent performance and improving flows. With that, I would like to open the floor to questions.

Thank you.

(Operator Instructions)

And our first question comes from the line of Adam Beatty with Bank of America. Please go ahead.

Thank you and good morning. Just a question on the sub-advisory channel. It has been improving for some time now, probably getting close to break-even. First of all, obviously if you could comment on the activity that you may have seen so far in January and whether it continues to be positive that would be great.

Also, sort of more broadly, in regards to your new distribution partners, are those qualitatively different from Daiwa in some way? Are they addressing different segments of the market, or is it kind of just more of the same and the improvement trend continues across the board?

Thanks.

Thanks, Adam. This is Bob.

Let me just add a couple of comments on the sub-advisory channel. First, in the outflow numbers that we saw in the quarter, ironically, we had a significant uptick in outflows, particularly in our US REIT portfolio when REIT performance spiked and the yen plunged. And so it was actually just a few days of significant profit taking, which we don't anticipate -- which I anticipate as non-recurring.

So there was, I guess, a bit of a high-class problem there. The other two new Japanese sub-advisory relationships are not materially different from Daiwa. They are selling into the same wealth management market. They're just different distributors, very substantial. We mentioned them previously, Nomura and Kokusai.

But they are -- they have launched new funds that are not US or global REIT funds. They are infrastructure and preferred securities funds. So they're selling into the same very large income-oriented Japanese wealth management marketplace. We're just delivering through other large distributors, new and different strategies. And we're hopeful that we'll be able to talk about additional sub advisory relationships in Asia that are not in Japan.

Thank you, Bob. I appreciate the detail. Just another question on the platform relationships. It's something, frankly, that I find a little bit puzzling, and maybe you've had some discussions with the folks that have just eliminated the allocation all together. The profit taking aspect makes total sense, but to eliminate allocations to real estate, it seems to me that broadly across the industry it's more of an underallocated asset class, and obviously it's probably a view that you wouldn't necessarily share and hopefully a minority view, but what's driving those decisions, in your experience?

Well, I think that's really one of the most important questions, looking back at last year, because candidly, in three out of four cases where we had large redemptions in the sub-advisory channel, three out of those four were not performance related at all, and two of them were REIT related. Both of them were surprises to us, because a year ago this month one platform eliminated their allocation, which surprised us because REITs had underperformed in 2013, and we expected the reverse. Then we had one other, a large one in the fourth quarter.

I think both of them are counter intuitive, as you're suggesting, and all I can say is that I think clearly in retrospect they were huge asset allocation mistakes, and I think those mistake in judgments were based on looking in the rear view mirror at REIT correlations in volatility in the years immediately following the financial crisis. And so pre-financial crisis besides attractive returns, low correlations to equities and volatilities somewhere between stocks and bonds is what really drove allocations to REITs.

And again, ironically, if you look at the data over the last two years, REITs have literally reverted right back to pre-crisis correlations and volatility, and so I think the asset allocation decisions were made by asset allocators who, frankly, were relying on dated and what turns out to be incorrect information in their asset allocation models. I am confident they regret those decisions and we're hopeful that they will return. So I can't state this with certainty, but I think those decisions and those outflows were anomalies. The trends, the fundamentals couldn't be better.

The need for income has never been greater. And so we're hopeful that those platform decisions were mistakes and are not recurring. We had another one that was significant in preferred securities where a significant amount of money came in, and six months later, they eliminated that allocation, and I presume that was based on another mistaken decision based on a changing outlook for interest rates.

Thanks for that explanation. It's great to get some insight on that way of thinking. That's all the questions I had today. Thanks again.

Thank you. And our next question comes from the line of Mac Sykes with Gabelli.

Good morning, gentlemen. Just in light of your comments on infrastructure and the President's State of the Union the other night and also bipartisan concern about infrastructure in the US, can you talk about the opportunities you see for those products and maybe some color on what's driving the flows, whether it's maybe income aspects or spending growth, expectations, or anything else that you could add?

That would be great. Thank you.

This is Joe Harvey. I'll address that.

Clearly, as you note there's been a lot of talk by the administration about the imperative to raise capital to fund infrastructure, and the imperative is to replace aging or obsolescing infrastructure in the US and developed markets but at the same time in emerging markets with the growth in population and urbanization there, there's a need to build new infrastructure. I think that's becoming pretty widely known and apparent, and the questions are how do you form that capital to execute those projects.

In terms of our focus, we're very focused on listed companies that have franchise positions and assets in all of the relevant areas. It's a very broad group of industry groups that have very attractive business characteristics of strong, predictable cash flows, growth profiles, and so what you get from that are companies that have attractive dividend yields with dividend growth potential.

As it relates to the public sector, or the government getting involved, and I'm not so sure that's going to present opportunities for us near term, but it clearly demonstrates the capital investment opportunity, and we have a very large universe of public companies that are well positioned to take advantage of that. In the institutional investment market, there's been a lot of investment in infrastructure. The vast majority of that so far has gone into the private market.

The challenge, however, is there's a limited amount of opportunities for that capital, because it takes time to find the opportunities and deploy the capital. So we've seen a backlog in those markets. The benefit to us is that those investors are understanding that there's a way to deploy those allocations in the public market and the listed markets and get the same type of economics, if not better economics with liquidity.

So we're increasingly seeing more and more allocations to listed infrastructure, and that's something that's happening around the world, and it's probably one of our best growth opportunities. In terms of the wealth management side, there's, of course, with all the talk about the imperative to finance infrastructure, there's growing interest, but it has been lagging the institutional market in adoption, but we're seeing that accelerate, too.

And with a subset of that being the MLP market in the US, energy independence trend, we think that's going to continue and we're going to have a period of cyclical downturn with energy prices coming down substantially, but -- so that's going to present opportunity to generate Alpha. It is going to present a new price point opportunity for what we think is a long-term secular opportunity.

Thank you. I appreciate that color. Thanks.

Thank you. And our next question comes from the line of John Dunn with Sidoti. Please go ahead.

Good morning.

Hi, John.

At the tail end of your comments on the Japanese sub-advisory you talked about some of those outside Japan. Could you just quickly remind us, or give us some more color on that aspect of it?

I really can't at this point. There are other developed markets in Asia where wealth -- there are significant wealth management platforms. There's several, actually that we're focused on, one of which we've made meaningful progress. We're not at the point where we can announce or say anything, but it's real, and again, income oriented products, particularly in Asia, are in huge demand. And as we talked about earlier, what we're excited about is being able to offer the full range of our income oriented capabilities, real estate infrastructure, preferred securities, MLPs, in multiple wealth management markets, and institutional markets throughout Asia.

Got you. And then on the advisory side, can you give us sort of -- I know it varies, but sort of average of what size mandates you guys are looking at, just so we have an idea of quarter to quarter what's a good quarter, what's bad quarter, in terms of getting new mandates?

I'm not sure how to really answer that question, John. We're focused on larger mandates these days, and to me, those are $100 million plus mandates. We've been seeing is them in commodities, in infrastructure and in real estate. We're hopeful that the level of activity there on a global basis will pick up significantly versus last year, but until we can talk about awarded mandates, that's just our goal.

But we are optimistic with our performance. It's absolutely clear that allocations to real asset strategies in general are going to be moving higher, and we think we're the obvious choice. So we're -- we are stepping up our institutional sales activity this year a bit. We're going to be bringing on a few additional professionals to call directly on the larger pools of capital out there. But that's a long-term process.

Got you. And the last one was, at the end of last year, you had said that you thought 2013 was going to be the trough for the operating margin, and even despite 2014 being another investment year, you would be able to make some progress on the operating margin. With 2015 likely to be another investment year with G&A up, do you think it's reasonable to expect that you could see some more improvement in profitability?

Yes, John, we never really give guidance on the margins, but with expenses being targeted, we said they're up next year, in 2015, but they're up because of the real assets institutes and some expansion space here in New York. The comp ratio declining, I think we internally do our own forecasts, and the revenue line should hopefully go up more than the expense line, and therefore, we would expect to see some margin expansion next year, yes.

Got you. Great. Thank you very much.

(Operator Instructions)

Our next question comes from the line of Rod Hinze with Keypoint Capital.

Do you think the redemptions area a function of more groups investing directly into REIT versus their allocation size or lack of allocation in general to REITs?

No. In all the cases that we're aware of, it was strictly an asset allocation decision on those platform changes. Obviously in some of our strategies we compete on a retail basis with ETFs, but passive or going internal on these wealth management platform losses, they were -- these are programs that only use outside managers.

Got it. Okay, thank you.

Thank you. Mr Johnson, at this time there are no further questions at this time. I will now turn the call back over to you. Please continue with your presentation and closing remarks.

Great. Well, thank you all for listening in this morning, and we're looking forward to having these discussions in future quarters, and we look forward to a great year this year. Thank you.

Thank you. Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation.