Cohen & Steers Inc (CNS) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Cohen & Steers first-quarter 2015 financial results conference call. (Operator Instructions) As a reminder, this conference is being recorded Thursday, April 16, 2015. And I would now like to turn the call over to Mr. Adam Johnson, Senior Vice President and Associate General Counsel. Please go ahead.

Thank you, and welcome to the Cohen & Steers first-quarter 2015 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 2014 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 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 that have filed registration statements with the SEC that have not yet become effective. This communication is not an offer to sell or a 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'll turn the call over to Matt.

Thanks, Adam. Good morning, everyone, and thanks for joining us today. Yesterday we reported net income of $0.45 per share compared with $0.43 in the prior year and $0.34 sequentially. Operating income per share was $0.47 for the quarter compared with $0.39 in both the prior year and the sequential quarter.

Revenue for the quarter was a record $83.8 million compared with $72.8 million in the prior year and $81.8 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 subadvised accounts. Average assets under management for the quarter were a record $55 billion compared with $47.7 billion in the prior year's quarter and $52.4 billion sequentially.

Our effective fee rate for the quarter was 57 basis points, in line with the fourth quarter. Operating income was $34.5 million compared with $27.6 million in the prior year and $32.4 million sequentially.

Our operating margin increased to 41.2% from 37.9% in last year's quarter and 39.5% sequentially, highlighting the operating leverage that has been created. The margin expansion was primarily due to lower compensation and benefits and G&A costs relative to revenue.

Pretax income net of noncontrolling interest was $33 million for the quarter compared with $30.6 million in the prior year and $28.3 million sequentially. Noncontrolling interest represents third-party interest in the funds we have consolidated.

Assets under management at quarter-end were a record $54.7 billion, an increase of $1.5 billion or 3% from December 31. The increase in assets under management was attributable to market appreciation of $2 billion, partially offset by net outflows of $451 million. Assets under management in institutional accounts totaled $26.7 billion at March 31, an increase of $503 million or 2% from the fourth quarter.

The $26.7 billion marks the highest level of institutional assets under management since the second quarter of 2011. The sequential increase in institutional assets under management was due to market appreciation of $1.1 billion, partially offset by net outflows of $618 million, the majority of which represent distributions out of subadvised portfolios in Japan.

Encouragingly, we recorded net inflows into all of our core non-REIT real asset strategies. If you annualize first-quarter flows, institutional accounts had a 9% decay rate. Bob Steers will provide some color on the level of activity in our institutional pipeline in a moment.

Open-end funds had record assets under management of $18.1 billion at March 31, an increase of $931 million or 5% from the fourth quarter. The increase was due to market appreciation of $764 million and net inflows of $167 million, which included $214 million of platform-related redemptions from our European real estate SICAV.

If you annualize first-quarter flows, open-end funds had a 4% organic growth rate. Assets under management in our closed-end funds totaled $9.9 billion at March 31, an increase of $95 million or 1% from the fourth quarter. And that was all due to market appreciation.

On a sequential basis expenses decreased 1%, primarily due to lower G&A and employee compensation and benefits, partially offset by higher distribution and service fees. The decrease in G&A was primarily the result of lower sponsored client conferences relative to last quarter, when we sponsored conferences both internationally on behalf of our distribution partners in Japan and domestically for a wealth management intermediary.

The compensation-to-revenue ratio for the quarter was 31%, consistent with the guidance provided on our last call. And the increase in distribution and service fee expense was consistent with the change in the average assets in our open-end mutual funds.

On a sequential basis non-operating loss net of noncontrolling interest decreased $2.5 million from a loss of $4 million last quarter to a loss of $1.5 million in the first quarter. Non-operating loss was primarily due to lower unrealized losses from our seed investments, the majority of which were held in commodity, MLP, and midstream energy strategies.

On our last call we projected an effective tax rate of 36.5% for 2015. That projection included an estimate for nonoperating gains which, due to accumulated capital loss carryforwards, would have resulted in no associated tax expense. Based on first-quarter results, our revised projection of nonoperating gains decreased, resulting in an increase in our estimated effective tax rate to 37%.

Now, turning to the balance sheet, our Firm liquidity totaled $158 million compared with $177 million in the fourth quarter. Stockholders' equity was $228 million compared with $231 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 2015. With respect to compensation and benefits, we expect to maintain a 31% compensation-to-revenue ratio. We still expect G&A to increase between 6% and 8% from 2014, with the second quarter approximating the amount recorded in the fourth quarter of last year. And finally, based on our preliminary projections, we expect our effective tax rate will approximate 37% for 2015.

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

Thanks, Matt, and good morning. During the quarter we saw a continuation of many of the same trends that have been experiencing throughout the year. Relative investment returns across the full array of our real asset and income strategies were strong, and retail demand for our income-focused strategies was high. However, we are also seeing consistent rebalancing activity, mainly in real estate, driven by strong returns and concerns regarding the prospect of a sustained rise in interest rates.

Institutional demand for income is more tepid, while real asset strategies -- especially global listed infrastructure -- are seeing clearly interest around the globe. More than ever the path of future global economic growth and US interest rates will likely dictate the direction and composition of future asset flows.

While there is little doubt that strategies that offer only income returns without growth prospects will suffer in a sustained rising rate environment, the same cannot be assumed for investments which offer income with growth and the prospect of inflation protection as real asset strategies have proven to do.

Turning to investment performance, this was another quarter of stellar results. All nine of our core investment strategies outperformed their benchmarks, and most by a wide margin. For the latest 12 months, eight of nine strategies have outperformed, with active commodities as the only exception. Equally important, currently all eight of our core strategies with a three-year track record have equaled or exceeded their benchmarks. Absolute returns in the quarter were mixed, with REITs, preferred securities, and infrastructure delivering solidly positive returns while commodity- and energy-related strategies remained weak.

As Matt noted, total Firmwide net outflows in the quarter were $451 million, but flows diverged significantly by channel and by strategy. Gross flows in the US wealth channel rose to $1.6 billion, a 20% increase over the fourth quarter of last year and the highest level since the second quarter of 2013. Net flows into our preferred securities fund were particularly strong, while our REIT funds experienced modest net outflows despite strong absolute and relative returns.

Encouragingly, total net inflows into our US open-end funds were $390 million. However, our European REIT SICAV, which delivered in excess of 40% returns over the past 12 months, received a $214 million platform-related redemption. So total open-end fund net inflows were just $167 million.

Activity in our institutional advisory channel is on the rise, and the primary focus is real assets. Net outflows totaled $189 million in the quarter, driven by a $280 million rebalancing from US REITs by a long-standing pension fund relationship that remains a large and satisfied client. On the other hand, we were pleased to find a new $75 million global listed infrastructure account and land our first natural resource equity mandate for $73 million, which was funded in the first quarter.

RFPs for the full range of real asset strategies are increasing, and currently our pipeline of awarded but unfunded mandates is approximately $400 million compared to $315 million in the fourth quarter. Subadvisory outflows extra ex-Japan were a modest $19 million. Net inflows into our large-cap value and commodity strategies were offset by rebalancing related outflows from global real estate and global listed infrastructure.

Looking ahead, we were pleased to announce last week that we have been selected by Argo Investments to subadvise Argo Global Listed Infrastructure Limited. Argo, which was founded in 1946 and is a leading Australian listed investment company with over 75,000 shareholders, intends to create a GLI as a new listed investment company on the Australian Stock Exchange.

For Cohen & Steers this is a great opportunity to grow assets with a strong partner and raise our profile in a large institutional marketplace that traditionally favors real assets. Subject to market conditions, we expect this investment company to be listed in the second quarter.

In Japan we saw net outflows of $410 million in the quarter. Of these outflows $108 million was from a REIT preferred fund launched late last year that achieved its 15% return target, triggering an automatic liquidation. Our partner is already back in the market with a replacement term fund, which is going well.

With yen-denominated US REIT returns exceeding 49% last year, not surprisingly there has been some profit-taking in this strategy. That said, we did still have US REIT net inflows of more than $185 million -- just not enough to offset distributions to shareholders.

Looking ahead, we are cautiously optimistic on our growth prospects for the remainder of the year. Our one- and three-year performance numbers position us well to compete for income and real asset flows in all channels. Investor demand for each of our strategies is increasing, with rebalancing out of real estate the main countervailing force.

Even here, investors could be in for a surprise. History shows that REITs have generated an average annual return of over 11% during the six monetary tightening cycles that have occurred since 1979. Time will tell, but in any event we believe that we are well positioned to deliver future growth.

With that, operator, let's open it up to questions.

(Operator Instructions) Adam Beatty, Bank of America Merrill Lynch.

Thank you and good morning. You mentioned in the discussion of flows some of the distributions that occurred in the quarter. I'd be interested in maybe a little bit more detail on that, and also the trend and the outlook, and what you expect in terms of distributions going forward?

I assume, Adam, you're referring to the distributions from the Japanese-based funds?

Yes. Correct.

The distributions have been fairly consistent over time, and they approximate $2 billion on an annual basis. That really hasn't changed much.

Okay. I appreciate it. And just looking across the Firm at the different flow trends, it looks like maybe the international trends are a little bit softer than domestic, and maybe that's a result of some appreciation and rebalancing. Do you think the foreign-exchange trend overall and the strong dollar is having an impact on flows?

That's a tough question to answer. We are, I think, seeing in the wealth channel a shift into European strategies of all kinds. So I think investor demand for European real estate strategies or global real estate strategies is rising, and demand for US REIT funds is relatively flat. If you look at the industry data, actively-managed open-end US REIT funds for the first-quarter flows were flat or down somewhat industrywide, despite the strong performance.

Sure. That makes sense. Thank you. And then just one final one, the outlook for marketing activity -- Matt gave some guidance around G&A. Just wondering about the strategy there and whether the approach of holding conferences and the Real Assets Institute is going to kind of be maintained at the current level? Or do you expect to taper that off sometime later this year or maybe next?

Currently, the plans are for that activity to remain high. There's a little bit of seasonality to it, so typically we won't have conferences in the summer months -- particularly July and August, when folks aren't around. And that picks up significantly in the fall. But we're finding the reception to the Real Asset Institutes -- both in the wealth management and institutional channel -- has been extremely strong. And so our plans are to continue at the current levels for the foreseeable future.

And, Adam, just as a reminder, last quarter the guidance for 2015 included -- the 6% to 8% increase includes an uptick in the investment in the Real Assets Institutes, plus a recognition that there's going to be more international travel. You know, we now have this Argo initiative, and we've got the extra distribution partners in Japan. So that's all a part of the increase in the G&A year over year.

Okay. So you'll be doing maybe some partner marketing with Argo or what have you?

Yes.

Yes.

Okay. Sounds good. Thank you very much for taking all my questions this morning.

(Operator Instructions) Mac Sykes, Gabelli.

Good morning, gentlemen. Just first statement -- I'm not sure if you listened to Larry Fink this morning on the BlackRock call, but he had a pretty big shout-out about infrastructure spending, and the importance of it, and shifting his platform to take advantage of that. So if you haven't seen the transcript from that, I would suggest that you do. Could you provide a little more detail about the Australian listing? Just how will it be funded? Will it be closed-end? How you will account for it in the AUM mix?

Well, it's a subadvisory relationship. So it's a fund that is going to be launched by Argo; we will be the subadvisor for those assets. We'll be listed in the subadvisory category.

It will be marketed in a similar fashion to a US closed-end fund, and it will be listed like a closed-end fund. Argo, as I mentioned in my remarks, is one of the oldest and most well-respected of the listed investment companies in Australia. They've been around a long time. They have a large installed investor shareholder base, and they have assembled a very significant syndicate in Australia. And that roadshow will be starting in the relatively near future.

This is Joe Harvey -- just a couple more points on the Australian-listed investment company market and contrasting it to the US market. It is a smaller market, but one where there's been more activity over the past year or so. One of the features of new issues in Australia is that they embed an option into the pricing of the funds, so that if the performance is good and the shares trade up relative to the option for the Initial Public Offering price, then there could be a second funding of the closed-end fund structure within the first couple of years of the fund.

The other thing that's a little bit different than what you see in the US is a little bit less focus on current income, which is good for us, because gives us the ability to manage for total return and produce the best results possible.

Great. And then I was sort of curious as to the divergence -- I think you mentioned a little bit about this -- but the inflows preferreds. The mutual fund obviously did very well, but sort of the outflows on institutional -- just curious as to -- for the appetite there. Was it just sort of a one-off in terms of the institutional component?

I'm not sure what the question is, but if I understand it correctly, I would say that we had very significant flows into our preferred strategy, in particular in the wealth channel, and that continues. I think that's a combination of, obviously, the continued demand for income and just the extraordinarily short- and long-term record that fund has.

In contrast, we are getting profit-taking -- whether it's European strategies that are up 40% or 50% in the last year, or US REIT strategies that are up significantly. We are seeing strong flows, but we are also seeing profit-taking, both in the wealth channel and also institutionally.

Great. That answers it. Thank you very much.

If I could just add -- your comment about Larry Fink's comments regarding infrastructure are significant. We have been saying for a while, and it feels like it's starting to happen -- listed infrastructure today is where REITs were 15 or 20 years ago.

There's no doubt that there's a almost undefinable demand for capital to replace aging infrastructure and build new infrastructure that goes well beyond any government's ability to finance that. So the capital markets, just as REITs did, are going to have to be a central component of the global infrastructure buildout.

And we are seeing it happen in the marketplace with IPOs. We are absolutely seeing an increase in demand for global listed infrastructure accounts, mainly institutionally -- wealth management, except for some targeted yield-oriented strategies in that space, have not yet gotten too excited about it. But institutionally, all around the globe, Asia as well as Europe, demand for infrastructure strategies, public and private, is definitely on the upswing. Our thesis and our view is that this is the very beginning of a powerful secular trend.

And the securitization activity, as Bob mentioned, has been pretty dynamic and illustrates what's going on. We've seen the IPO -- the very successful IPO of a Spanish airport, so privatization transaction -- the government raising money. Another interesting dynamic is our vehicles that are created to deliver income from infrastructure assets. So we've seen power generation, transmission assets being structured in the REIT structure.

So if you can marry these hard assets, which have strong cash flows -- predictable and growing cash flows -- and then deliver those characteristics in a tax-efficient vehicle such as a REIT or an MLP, there's very significant demand. So multiple IPOs and MLP structures -- we've had the first REIT in infrastructure. We have more and more yieldcos, which are bringing solar and wind assets to the public market. And it's providing a growing universe for our team to mine alpha opportunities.

(Operator Instructions) Adam Beatty, BofA Merrill Lynch.

Hello, again. Thank you for taking my follow-up. Just wanted to ask about -- there was a fund, I think in Japan, that had a forced liquidation based on hitting a performance target -- which is obviously a good outcome, but doesn't necessarily look great for the flows. It would be great if you could size how many other strategies, or how much AUM, or what have you that's out there for Cohen & Steers with a similar structure? And are there some that are close to hitting targets that would also force either redemption or liquidation? Thanks.

The preferred fund that was launched in, I think, October of last year was the first fund that we have in Japan which has, well, two features to it -- one is a limited term, and in that case it was a three-year term; and the second feature was to have an automatic liquidation if the fund achieved a 15% return.

So that liquidation has happened. But as Bob mentioned, we are with Daiwa marketing the next in that term series, which is intended to be an ongoing series of term funds for the preferred strategy. So none of our other subadvised portfolios in Japan have that feature.

And just for clarification, the 15% return came in part through the income and appreciation we generated. But the majority of it came from yen depreciation versus the dollar. So the kind of high-class issue of having a short life to that fund but providing a spectacular return for investors in Japan.

Got it. That's very helpful. Thanks again.

Thank you. At this time there are no further questions. I will now turn to call back over to Mr. Adam Johnson. Please go ahead.

Thank you. And that concludes today's presentation. Thanks for participating, everyone.

Thank you, ladies and gentlemen. That does conclude today's call. We thank you for your participation and ask that you please disconnect. Have a great day.